How to Calculate the Optimal Risk-Reward Ratio (You Can Profit Even with a Low Win Rate)
4 min read · · Korean original
Contents 4
Hello, this is Bitpunk. In this post, I'd like to share how to calculate the risk-reward ratio and apply it to your actual trades. Did you know that if you calculate and set your risk-reward ratio well, you can make a profit even with a low win rate?
What Is the Risk-Reward Ratio?
In English-speaking countries, the risk-reward ratio is also called R:R (Risk to Reward Ratio). Put simply, it's the ratio of risk to reward. In other words, it measures how much you stand to lose or gain on a given trade.
You might think a better risk-reward ratio is always better. After all, better is better, right? In reality, though, your risk-reward ratio should match your own win rate. That's the only way to make a profit with the optimal risk-reward ratio.
Win Rate and Calculating the Optimal Risk-Reward Ratio
What is the optimal risk-reward ratio? It's the risk-reward ratio that matches your own win rate. Let's take a look at the table below first.
| Win Rate | Minimum Risk-Reward Ratio (Profit:Loss) |
| 25% | 3:1 |
| 33% | 2:1 |
| 40% | 1.5:1 |
| 50% | 1:1 |
| 60% | 0.7:1 |
| 75% | 0.3:1 |
The table above shows the minimum risk-reward ratio you need for a given win rate. If your win rate is 33%, your profit-to-loss ratio should be 2:1. This means the ratio between the profits and losses you actually realize should be 2:1.
Sounds a bit complicated? For example, if you're trading with KRW 10 million and decide to take profit at KRW 300,000, you need to set your stop loss at the point where you're down KRW 200,000 to match a 2:1 risk-reward ratio. In other words, you take profit at 2% and cut your losses at -1%.
If you trade with a risk-reward ratio matched to your win rate like this, you can statistically protect your funds. And if you take just a little more profit on top of that, your capital will trend upward.
How to Trade with the Optimal Risk-Reward Ratio
Now that we've covered the optimal risk-reward ratio for each win rate, let's look at how to use it in actual trading.
Before that, here are the 2 exchanges I use most often for Bitcoin futures trading, along with fee discount links. They're the best in terms of liquidity and security. When you trade with leverage, as in futures trading, and calculate your risk-reward ratio, fees really matter. So if you use these exchanges, be sure to sign up through the links below to get the fee discount.
Now let me show you how to trade with the optimal risk-reward ratio. First, to trade using a risk-reward ratio, a target price and a stop loss are essential. For example, if you're a trader with a 33% win rate, you can start closing your position in parts once your profit reaches 2% or more, and set your stop loss at -1%.
As we covered in the previous post on risk management, you can extend this up to the point where your maximum loss is 5%. In other words, you can start taking profit once your gains reach 10%, and close all your positions when your loss hits -5%. In actual trading, it's a good idea to account for fees and leave a conservative buffer of +-1~2%.
Summary
In highly volatile markets like Bitcoin futures, it's important to establish your own optimal trading rules based on your win rate and risk-reward ratio. Here are the 3 final steps to do that.
- Find out your win rate from your past trades.
- Refer to the table above and choose the risk-reward ratio that fits your win rate.
- Set your target price and stop loss, then enter the trade.
If you haven't read the previous article, be sure to check it out. You can learn why you should limit your losses to a maximum of 5% and how to set your position size and leverage.
That wraps up how to calculate the optimal risk-reward ratio to protect your assets and make a profit. If you found this post helpful, please give it a heart below. Thank you.
