Stop-losses, risk/reward and break-even win rate
Where to place a stop-loss, how to calculate the risk/reward ratio, and how it sets the win rate you need just to break even.
Every trade has two possible ends: the price goes your way, or it does not. A good plan decides both endings before you enter.
Placing the stop-loss
A stop-loss is an order that closes your position at a set price to limit the loss. Place it where your trade idea is clearly proven wrong, not at a random percentage. For a buy near support, that is usually a little below the support zone. Two practical tips:
- Give the trade room for normal noise. A measure like the Average True Range (ATR) shows how much the price usually moves in one period.
- Do not place stops exactly on obvious round numbers, where many other stops sit.
Once placed, a stop should only ever move to reduce risk, never to increase it.
Risk/reward ratio
The risk/reward ratio compares what you could lose with what you hope to gain. If your stop is 2.50 below entry and your target is 5 above entry, the reward is twice the risk, written as 1:2.
Break-even win rate
The risk/reward ratio decides how often you need to win just to break even, before fees. The formula is:
Break-even win rate = 1 ÷ (1 + reward-to-risk)
| Risk : Reward | Break-even win rate |
|---|---|
| 1 : 1 | 50% |
| 1 : 2 | about 33% |
| 1 : 3 | 25% |
| 2 : 1 (risk 2 to make 1) | about 67% |
You risk 100 per trade and target 200. Over 10 trades, you win 4 and lose 6. Wins: 4 × 200 = 800. Losses: 6 × 100 = 600. Net result: +200, even though you lost more trades than you won. With 1:1 trades, the same 4 wins and 6 losses would give 400 − 600 = −200.
A healthy warning
A big target does not make a trade good. Targets far away are hit less often, so a 1:5 trade may win rarely. The target should sit at a realistic place, such as just before the next resistance zone. Also remember that fees on every trade raise the real break-even win rate, which is one reason frequent trading is so hard to profit from.
On your next practice trade at /app/trade, attach both a stop-loss and a take-profit before you submit. Write down the risk/reward ratio and the break-even win rate it implies.
A free account tracks lessons, unlocks the quizzes and gives you 10,000 virtual USD (no real value) to practise with.