Calculating it
Measure the distance to your stop and the distance to your target from the same entry, then express them as a ratio. The measurement must use realistic levels — a target placed at a price the asset has never reached inflates the ratio without improving the trade.
Entry $100, stop $95, target $115. Risk $5, reward $15 → 1:3. If the target is instead $105, the same stop gives 1:1 and the trade needs a much higher win rate to be worth taking.
Ratio and win rate are one equation
This is why a strategy losing two out of three trades can be strongly profitable, and why a 70% win rate at 1:0.5 quietly bleeds money.
- At 1:1 you need to win more than 50% of trades to profit.
- At 1:2 you need more than 33%.
- At 1:3 you need more than 25%.
- At 1:5 you need more than 17%.
Expectancy is the number that matters
Expectancy per trade is (win rate × average win) minus (loss rate × average loss). A positive number means the strategy makes money over enough trades; a negative one means no amount of discipline will save it. The ratio and the win rate are inputs — expectancy is the answer.
45% win rate, average win $300, average loss $150: (0.45 × 300) − (0.55 × 150) = $52.50 expected per trade.
Where the ratio gets gamed
- Setting an unrealistic target to make the ratio look acceptable.
- Moving the stop closer after entry to improve the ratio on paper.
- Taking profit early and letting losses run to full stop — the real ratio then differs from the planned one.
- Ignoring spread, commission and funding, which shift the true break-even against you.