Beginners usually ask "what is the win rate?" It is the wrong first question. A strategy that wins 70% of the time can lose money, and one that wins 35% of the time can make it. What matters is how the wins and losses compare.
R multiples
An R multiple expresses a trade result in units of the amount you risked. If you risk £100 and make £200, that is +2R. If you are stopped out, that is −1R. Using R lets you compare trades regardless of account size or instrument.
Risk-to-reward
Risk-to-reward compares the distance to your target with the distance to your stop. A target twice as far as the stop is 1:2. The ratio is a property of the plan, not a promise that the target will be hit.
The break-even win rate
For a given ratio, there is a win rate below which you lose money before costs:
- 1:1 needs more than 50% winners.
- 1:2 needs more than 33.3%.
- 1:3 needs more than 25%.
The formula is 1 √∑ (1 + reward-to-risk). Costs such as spread and commission raise these thresholds.
Expectancy
Expectancy is the average result per trade in R, given your win rate and average win and loss:
With a 40% win rate, an average win of 2R and an average loss of 1R, expectancy is 0.4 √ó 2 ‚àí 0.6 √ó 1 = +0.2R per trade. With the same win rate but only a 1R average win, it is ‚àí0.2R. The only difference is what you earn when you are right.
Try your own numbers in the free expectancy calculator.
The catch
Expectancy is only meaningful if the inputs come from many real, honestly recorded trades. Plugging in numbers you hope for produces a forecast of your hopes, not of your results. And even a positive expectancy produces losing streaks.