Strategy and performance
Risk-reward ratio
The size of a trade's target relative to its stop, expressed as a ratio. A 2:1 trade risks one unit to make two, which sets the win rate the strategy needs in order to be profitable.
Also called: Reward-to-risk · R:R
GFN’s figure
Against a GFN 10% 1 Step target, 0.5% risk per trade at 2:1 needs a net of ten winning trades to clear $10,000 on a $100,000 account - before $3.50 per side, $7 per lot round turn.
In detail
Risk-reward ratio,explained
Ratio and win rate are two halves of one number. At 2:1 a strategy needs to win more than a third of the time to break even; at 1:1 it needs more than half; at 1:3 it needs more than three quarters.
A ratio quoted from planned levels is not the ratio achieved. Slippage, commission and partial exits all push the realised figure below the planned one, so the plan needs margin.
Related
Terms thatcome with it
Most rules only make sense next to the ones they interact with. These are the entries this one depends on.
R-multiple
A trade's result expressed in units of its initial risk. Risking $200 and making $600 is +3R; hitting the stop is -1R. It makes results comparable across account sizes and position sizes.
Win rate
The proportion of trades that finish profitable. On its own it says nothing useful - a 90% win rate with one outsized loss and a 35% win rate with large winners can produce the same result.
Expectancy
The average result of a trade over a large sample, combining win rate and average win and loss. A positive expectancy is necessary for a strategy to work and not sufficient for it to pass an evaluation.
Take profit
A resting order that closes a position at a target price. Paired with a stop loss it fixes the reward-to-risk ratio of a trade at the moment it is placed, before the outcome is known.
Profit factor
Gross profit divided by gross loss across a sample of trades. A profit factor above 1 means the strategy made money; below 1 means it lost, whatever the win rate suggests.
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