The Myth of Risk Reward is Only Half the Equation

The problem with traders targeting a random amount such as 2/1 Risk Reward is they are only working out half of the equation. Traders who have a win rate of 25% can be profitable and traders that have a win rate of 85% can be profitable. What will be different for each of these two traders is what Risk Reward they will need to target to be profitable.

As traders go for the bigger Risk Reward trades, their win rates, I guarantee will come down substantially, as opposed to the trader that takes profit regularly and should have a much higher win rate. A trader that only wins 25% of their trades is going to need a large Risk Reward each winning trade just to stay in the game. This trader can take many losing trades as long as they have a large Risk Reward trade to make up for their losses.

Another trader that averages 85% win rate will need a much smaller Risk Reward per trade as they are not sustaining the same amount of losses as the trader with only a 25% win rate. It does not matter whether you are the trader that has a high win rate or a trader with a low win rate, the goal is being profitable over the journey. For this to be possible the trader needs to work out more than just the random number that they need to target as their Risk Reward for each winning trade.

Traders need to work out what trader they are, and the win rate they average. From this number they can then work out what Risk Reward they need minimum per trade to be profitable. This will be different for everybody.

I myself like to have a high win rate and bank consistent profits. I personally found that when I began increasing my trade size, I no longer wanted to take large hits to my account and wait for the big Risk Reward trades to cover the losses. Instead I adopted an approach where I bank profits regularly, and because of this, to remain profitable, I need a much smaller Risk Reward per trade as my win rate is high.