# Win rate and reward-to-risk > A plan that wins three trades in ten can make money, and one that wins eight in ten can lose: see how the size of wins and losses decides, and find the break-even win rate. - Course: [Trading Basics: How It Works, How Not to Lose Everything](https://productovi.com/courses/trading.md) - Module: Can I lose often and still come out ahead? - Lesson 13/32, ~27 min - Source: https://productovi.com/courses/trading/win-rate-and-payoff ## Eight in ten **Alex Tutor:** Back on your Pebble practice account, today Nora and Marc are comparing their last ten trades. The figures are already after costs. **Nora:** I won 8 of my last 10. That's an 80% **win rate**. Marc won 3 of 10. Who needs lessons now? **Marc:** My account went up, though. Hers went down. **Alex Tutor:** Both can be true, because the win rate counts trades, not dollars. We need two more numbers: the average win and the average loss. ![Nora holds a basket of many small pebbles while two big stones fall out of it; Marc holds a few big blue pebbles with tiny ones at his feet; Alex looks between them.](https://productovi.com/courses/trading/diagrams/m4-l1-scene.png) **Nora:** My wins average 50 dollars. My two losses were about 250 each. **Marc:** My wins average 300. My losses average 100. > **Exercise:** Nora: 8 wins averaging 50 dollars and 2 losses averaging 250, after costs. What is her total for the 10 trades, in dollars? **Nora:** Fine, I lost a little. But Marc loses seven times in ten. That can't add up to much. **Alex Tutor:** Don't argue with it, count it. Same method: wins times the average win, minus losses times the average loss. **Sofia:** And Marc: 3 × 300 = 900, minus 7 × 100 = 700. > **Exercise:** Marc: 3 wins averaging 300 and 7 losses averaging 100, after costs. What is his average result per trade, in dollars? **Alex Tutor:** Plus 20 a trade, while losing seven times out of ten. Losing often is fine if the losses are small and the wins are big. **Nora:** That feels wrong. Losing seven times in a row would drive me mad. **Alex Tutor:** Feelings and arithmetic disagree a lot in trading. Let's put names on Marc's numbers, so you can check any plan. ## Two ratios **Alex Tutor:** **Reward-to-risk** compares what a trade aims to make with what it risks to the stop. Marc plans to make 300 when he risks 100: 3 to 1. Nora took 50 when she risked 250: 0.2 to 1. **Alex Tutor:** The **payoff** is the same idea measured afterwards: average win divided by average loss over real trades. Plans promise a reward-to-risk; journals show the payoff. > **Exercise:** Match each term with its meaning. **Alex Tutor:** Try a reward-to-risk on a plan before any trade happens. Three prices are all you need. > **Exercise:** On Northwind Foods (NWF) you plan to buy at 40.00, with the stop at 39.00 and the target at 43.00. What is the planned reward-to-risk? Enter the first number of the ratio (for 2 to 1, enter 2). **Sofia:** So how often must a plan win just to break even? **Alex Tutor:** Wins must pay for losses exactly. That happens when the win rate equals the average loss divided by the average win plus the average loss. **Marc:** I work this number out before I start any new plan. If the plan can't clear its own break-even line on paper, it won't on the account. $$ \text{break-even win rate} = \frac{\text{average loss}}{\text{average win} + \text{average loss}} $$ *The win rate at which a plan makes zero after costs* > **Exercise:** Marc's average win is 300 and his average loss is 100. What win rate does he need just to break even, in percent? **Nora:** And mine? **Marc:** So my line is 25%, and I win 30%. Not much room, but room. **Alex Tutor:** Right, Marc. And yours, Nora: 250 / (50 + 250) = 83.3%. You need to win more than 83 trades in 100 just to stand still. Your 80% is below that line. **Alex Tutor:** Now a plan where wins and losses are the same size. Where is its line, and what does 45% do to it? > **Exercise:** A plan on Bluefin Energy (BFE) has an average win of 120 and an average loss of 120, after costs, and wins 45% of its trades. What happens over many trades? **Marc:** That's the usual trap. Taking small wins quickly feels good, and holding a loser "until it comes back" feels hopeful. Together they make a high win rate that loses. **Alex Tutor:** Which habits push that line up? More than one answer fits. > **Exercise:** Which habits push a plan's break-even win rate up, so it needs more winning trades just to stand still? > **Exercise:** A plan with a higher win rate always makes more money than a plan with a lower one. **Sofia:** Ten trades each, though. Isn't that a bit few? **Alex Tutor:** Far too few to judge either of them. These numbers show how the arithmetic works. Before trusting a win rate or a payoff from a journal, you want at least 30 trades, and more is better. **Nora:** Fine. But a sign saying "80% winners" still looks great. **Marc:** That's exactly why people put it on signs. > **Exercise:** An ad for a trading course says: "Our students win 9 trades out of 10!" In 2–3 sentences, explain what you would need to know before believing it means anything, with a small worked example. > **Key ideas** > > - The **win rate** counts how often a plan wins; it says nothing about how much. > - **Reward-to-risk** is planned gain against planned loss; the **payoff** is the average win over the average loss in real trades. > - Per 10 trades: Nora (80%, +50, −250) makes −100; Marc (30%, +300, −100) makes +200. > - **Break-even win rate = average loss ÷ (average win + average loss)**: 25% for Marc, 83.3% for Nora. > - Judge these numbers only on 30 or more trades, after costs. > **Educational, not advice** > > This course explains how trading works; it never tells you what to buy or sell. The numbers here are made up to show the arithmetic; they promise nothing. Most people who trade lose money, and you can lose all of it. For taxes and rules, check with a licensed professional where you live. - Previous lesson: [Case: size three trades](https://productovi.com/courses/trading/size-three-trades.md) - Next lesson: [Expectancy: the average trade](https://productovi.com/courses/trading/expectancy.md) --- Productovi Learning. Free, no sign-up needed to read.