Hello Traders,
The debate seems to be which is more important win rate or risk/reward ratio?
I believe that both are important, and you can’t let either dominate your decision process. First I will explain what each refers to.
Win rate is the percentage of winning trades you have. As we are swing trading most strategies then the win rate will not be 95% or whatever you hear on the internet about the newly touted winning system.
We are applying an edge which can only work a percentage of the time and anything over 50% will make you real money realistically.
An exceptionally good month might get upwards 80% but that isn’t the norm and what you should expect.
Of course each strategy and trading year is different so backtesting and running a strategy will reveal it’s sweet spot.
This is balanced by risk reward which is how much you are making on the trade for the amount of risk.
Let’s say you have 50 pips of risk on the trade. You then close the trade out for 100 pips of profit. That equals a 1:2 or 2x risk/reward ratio.
The reason I believe both are important is a psychological one. If you are too focused on a high win rate, you begin to cut trades off way too soon before they have had a chance to go to work and make money.
Markets don’t move in a straight line and by being too tight just to make sure you lock in winners every time, you will lose the potential to make real money and look like a scalper:)
On the other hand, if you demand that your trades must make a 2x risk reward ratio, then you run the risk of letting trades run all the way to your target only to turn around and stop you out for a loss.
Understanding your system and following the rules will help you learn what is normal movement and how you can react at certain points depending on the markets movements and balance both the win rate and risk/reward ratio to what is optimum.