# Day Trade Better Using Win Rate and Risk-Reward Ratios

## It' not just about winning, but making your winners count

t would seem that if you could win 70% of the trades you make you'd be a profitable trader, but that just isn't the case. Traders also need to assess the quality of their wins and losses. Striking a balance between win-rate and risk-reward rations is crucial to success.

### Day Trading Win-Loss Ratio

Most day traders focus on the win-rate or win/loss ratio. The allure is to eventually reach that stage where nearly all their trades are winners. Don't be fooled, having a high win rate doesn't mean you'll be a successful trader or even a profitable one.

Your win rate is how many trades you win out of all your trades. For example, if you make five trades a day, and win three, your daily win rate is 3/5=0.6, or 60%. If there are 20 trading days in the month, and you won 60 out of 100 trades, your monthly win rate is 60%.

The win-loss ratio is your wins divided by your losses. In the example, assume for simplicity 60 trades were winners and 40 were losers (100 - 60). This assumes there were no "flat" trades. The win-loss ratio is 60/40=1.5. This means you are winning 50% of the time more than you are losing. A win-loss ratio above 1.0, or a win rate above 50%, is favorable, but it isn't the only story.

### Day Trading Risk-Reward Ratios

A risk-reward ratio is how much you expect to make on a trade, relative to how much you're willing to lose.

Day traders want to be in and out of the market quickly, taking advantage of short-term patterns and trade signals. This typically means each trade will have a stop loss attached to it. The stop-loss determines how many cents, ticks or pips you are willing to risk in a stock, future or forex pair respectively.

Assume you are willing to risk $0.10 on stock XZYZ, buying it at $10.00 and placing a stop loss at $9.90.

Your risk is fixed at $0.10 (assuming no slippage), but you must be compensated for taking this risk with a potential profit as well. Your profit target establishes your expected payoff.

Assume, based on your analysis or trading strategy that you believe the price will reach $10.20, at which point you will take profit, resulting in a $0.20 gain.

Your potential reward is therefore twice as large as your potential risk. Your risk/reward ratio is $0.10/$0.20=0.5; in other words, your risk is half of your potential gain.

If you take a profit at $10.10, your potential profit and risk are both $0.10, so the risk/reward ratio is $0.10/$0.10=1.0. If you take profit at $10.05 your potential risk is $0.10 but your reward is only $0.05. In this case, the risk/reward increases to 2.0 showing that you are risking more to make less.

### Balancing Win Rate and Risk-Reward in Day Trading

Day traders must strike a balance between win rate and risk-reward. A high win rate means nothing if the risk-reward is very high, and great risk-reward ratio may mean nothing if the win rate is very low.

Consider these guidelines when you start coming up with a day trading strategy or are looking to improve your day trading results:

- A higher win rate means your risk-reward can be higher. You can still be profitable with a 60% win rate and a risk reward of 1.0. You'll be more profitable with a 60% rate and a risk-reward below 1.0.
- A low win rate, 50% or below, requires winners to be larger than losers in order for you to be profitable. You can still be profitable with a 40% win rate if risk/reward is below 0.6 (excluding commissions). Ideally, if your win rate is below 50% strive for a risk/reward below 0.65, with the risk-reward decreasing the more the win rate drops. The more you lose, the bigger your winners must be when you do win.

### Day Trading at Your Peak Ratios

Since day traders trade every day in all types of conditions, most day traders should seek out a strategy that allows them to win between 50% and 70% of the time. Winning more than that becomes increasingly difficult with only minor additional payoff.

This win rate allows for some flexibility in the risk-reward ratio. Strive to make a bit more on winners than you do on losers; ideally, wins should be about 1.5 times greater than risk - if risking $0.10 try to make at least $0.15. This risk/reward ratio is 0.67. Keep the risk/reward below 1.0, that way even if you have an off day, only winning 40% of your trades, you can likely still pull out a daily profit.

Your ideal mix will depend on your trading style. But you don't need a very high win rate or a super low risk/reward ratio to be successful. Strike a balance, and strive for consistency.