Every traders must have come across this epic question of which one to give more value, high winrates or high risk-reward, winrate is – how many of your % trades tend to come out profitable, you can have a 60% winrate which is considered decent, for many experienced traders with 70-80% win rates are not uncommon, on the other side risk-to-reward ratio, is basically how much typically you make against your losers, a 1:1 of risk-reward works well most of the time, the higher the better.
When we design a strategy, algorithmic or price pattern, it will have a characteristic winrates and risk-reward, some strategy have high winrate and low risk/reward, and reverse is also true, by evaluating these we can either discard or accept that particular strategy, because it must have acceptable winrate and reward ratio both, note that a high winrate with very poor risk-reward is not useful similarly a high risk-reward but loses quite often is equally bad, therefore when we say high winrates that means, risk-reward is also fixed, typically 1:1.
This article is for day traders and not a investing or positional trading material, for investing or any long term trading clearly the focus must be towards high reward/risk ratio. you maybe losing 7 out of 10 traders but those 3 winner will make up for all losses. Warren buffet will tell you how much he loves high reward to risk and lots of buffet folks will advice you the same, but is it one fit for all? is it good for everyone, not so simple.
As we know, winrate and risk-reward runs contrary to each others, you can’t have both in favour, means for a higher profits one has to give up some portion of from winrates and vice versa, so again the same question arise, which one is more valuable – winrate or reward to risk? Let me again clarify this guidance is only for day trading. and for day trading winrates are more important than risk to reward ratio.
Why it is so, to figure out this we must understand significance if both, winrate and risk-reward, a lower winrates simply means you are doing something wrong in your analysis or make mistakes, perhaps your market knowledge is not up to the level or you lack psychological robustness, whereas a consistently high winrates means you are right path. Second the higher risk-reward means you as a trader have been able to develop a stable mind and patience. so reality is both are important but not equally for everyone, typically in the beginning of your trading career you must focus on high winrates, combined with at least 1:1 risk-reward, later when you have mastered trades, you should be improving on reward to risk, because your experience has already made you the master of trades and don’t make mistakes.
To sum up, aiming for high risk-reward comes later in the trader learning phase, and don’t fall for anyone who is giving you a black and white answers.