The image explains the relationship between the risk-to-reward ratio and the win rate required to be profitable in trading. Here’s a breakdown of the key points:
Risk-to-Reward Ratio and Win Rate:
- 1:1 Risk to Reward Ratio:
- Win Rate Required: 51%
- For every 100 trades, you need to win 51 trades and can lose 49 to break even.
- 1:2 Risk to Reward Ratio:
- Win Rate Required: 34%
- For every 100 trades, you need to win 34 trades and can lose 66 to break even.
- 1:3 Risk to Reward Ratio:
- Win Rate Required: 26%
- For every 100 trades, you need to win 26 trades and can lose 74 to break even.
Win Rate Table (Lower Section):
This table compares different risk-to-reward ratios with win rates, indicating whether a trader will profit or incur a loss. The matrix shows:
- 1:1 Risk-to-Reward: Requires a win rate of at least 60% to be profitable.
- 1:2 Risk-to-Reward: Becomes profitable at a win rate of 40% or higher.
- 1:3 Risk-to-Reward: Profits begin at a 30% win rate.
- 1:4 Risk-to-Reward: Even a win rate as low as 25% is profitable.
- 1:5 Risk-to-Reward: With a win rate as low as 20%, you can still be profitable.
In summary, the higher your reward compared to the risk, the lower your win rate needs to be to maintain profitability. Conversely, if your risk and reward are equal, a higher win rate is required to break even.
