Why a High Ratio Does Not Guarantee a Good Trade?
Learn why a favourable risk-to-reward ratio alone doesn't guarantee a profitable trade or strategy, using worked hypothetical examples.
- 7 min read
- For beginners
- Educational
- Lesson 4 of 5
This lesson directly addresses an important nuance introduced earlier in this module: a favourable risk-to-reward ratio does not, by itself, guarantee a profitable trade or trading approach. This guide demonstrates why with worked examples.
All figures in this lesson are hypothetical and illustrative, used purely to demonstrate a mathematical concept.
A Favourable Ratio with a Low Win Rate Can Still Lose Money
Consider a hypothetical trader using a 1:2 ratio (risking $100 to potentially gain $200) — a ratio that might sound attractive on its own. As covered in the earlier lesson, the mathematical breakeven win rate for this ratio is approximately 33.3%.
If this hypothetical trader's actual win rate were only 30% — below that breakeven threshold — the strategy would produce a net loss over time, despite the seemingly favourable 1:2 ratio, illustrating that ratio alone does not determine profitability.
Why This Happens Mathematically
A risk-to-reward ratio only describes the relationship between a single potential win and a single potential loss — it says nothing about how often wins versus losses actually occur. A strategy can have an excellent ratio and still be unprofitable if its actual win rate falls short of what that ratio mathematically requires to break even.
The Reverse Is Also True
Similarly, a strategy with a seemingly less impressive ratio (such as 1:1) can still be profitable if its win rate is sufficiently high above the 50% breakeven threshold discussed in the earlier lesson. Ratio and win rate need to be considered together, not evaluated as if either one alone tells the complete story.
Connecting to Trade Expectancy
This is precisely why the trade expectancy formula, covered in the next lesson, combines both win rate and reward ratio (via average win and average loss) into a single calculation — providing a more complete way to assess whether a trading approach is likely to be profitable over time, rather than looking at ratio or win rate in isolation.
Summary
A favourable risk-to-reward ratio, such as 1:2, can still result in an unprofitable strategy if the actual win rate falls below the mathematical breakeven threshold that ratio requires — in this case, approximately 33.3%. This demonstrates why ratio and win rate must be considered together, which is exactly what the trade expectancy formula, covered next, is designed to do.
Frequently Asked Questions
Yes, if the actual win rate falls below the mathematical breakeven win rate required for that ratio, the strategy would produce a net loss over time, despite the favourable ratio.
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