Winrates required to breakeven relative to stop & target sizes
Taking AUDUSD as an example here, the spread is not the smallest relative to ATR nor the largest.
The formula to get a breakeven winrate is 1/(1+reward/risk).
Because we want winrate*reward = loserate*risk <=> winrate*reward = (1-winrate)*risk <=> winrate*reward + winrate*risk = risk (never 0) <=> winrate = 1/(1+reward/risk)
For example with a 20 pip stop, base risk to reward of 1 to 5, and 2 point spread, reward or winners = 98 pips, risk or losers = 22 pips.
So the reward/risk = 98/22 = 4.4545454545... So the breakeven winrate will be 1/5.4545454545 = 18.33%
That is just the breakeven winrate.
Profitability will of course depend on:
- Frequency: How many trades you are able to take
- Winrate: How much higher than the breakeven winrate it is
- Position size: Profitability does not go up the higher it goes
If a strategy or trader only gets a couple of trades a year and his winrate is barely above breakeven, he will not be very profitable, and it will be very easy to lose all profits.
And as the stops & targets in pips go down, the hit rates needed to actually make money go up exponentially up to a point where the trader needs to own a crystal ball and be able to predict the future.
Take costs into consideration with any strategy and before placing any trade.
And 1 other thing to keep in mind is spreads can also fluctuate, depending on the broker, at certain hours they can go up 3 fold, sometimes more, it can really hurt.
A cool thing you may notice is with a stop of 20 pips, the spread/stop = 10% and also the winrate to breakeven is increased by 10% for both risk to rewards.
Same thing with the 5 pips stop. And so on. The required winrate to breakeven increases by 100*(spread/stop)%.
Easy to quickly calculate when you are considering trades.
The formula to get a breakeven winrate is 1/(1+reward/risk).
Because we want winrate*reward = loserate*risk <=> winrate*reward = (1-winrate)*risk <=> winrate*reward + winrate*risk = risk (never 0) <=> winrate = 1/(1+reward/risk)
For example with a 20 pip stop, base risk to reward of 1 to 5, and 2 point spread, reward or winners = 98 pips, risk or losers = 22 pips.
So the reward/risk = 98/22 = 4.4545454545... So the breakeven winrate will be 1/5.4545454545 = 18.33%
That is just the breakeven winrate.
Profitability will of course depend on:
- Frequency: How many trades you are able to take
- Winrate: How much higher than the breakeven winrate it is
- Position size: Profitability does not go up the higher it goes
If a strategy or trader only gets a couple of trades a year and his winrate is barely above breakeven, he will not be very profitable, and it will be very easy to lose all profits.
And as the stops & targets in pips go down, the hit rates needed to actually make money go up exponentially up to a point where the trader needs to own a crystal ball and be able to predict the future.
Take costs into consideration with any strategy and before placing any trade.
And 1 other thing to keep in mind is spreads can also fluctuate, depending on the broker, at certain hours they can go up 3 fold, sometimes more, it can really hurt.
A cool thing you may notice is with a stop of 20 pips, the spread/stop = 10% and also the winrate to breakeven is increased by 10% for both risk to rewards.
Same thing with the 5 pips stop. And so on. The required winrate to breakeven increases by 100*(spread/stop)%.
Easy to quickly calculate when you are considering trades.