Quant Trading Daily: Balancing Risk-Reward and Win Rate
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Using two strategies (A: risk $1 to make $1, 60% win rate; B: risk $1 to make $3, 30% win rate), the source shows both have the same expected edge per trade (+$0.20) but differ significantly in the probability of consecutive losses, highlighting the need to consider psychological executability.
01 ABSTRACT
The source uses numerical examples to illustrate that different combinations of win rate and risk-reward ratio can yield the same edge per trade. The author's view emphasizes that the same mathematical edge does not mean the same trading experience; the high-volatility path may affect execution.
02 KEY FINDINGS
- Strategy A (60% win rate, 1:1 risk-reward) and Strategy B (30% win rate, 1:3 risk-reward) both have an expected profit of +$0.20 per trade.
- Over 100 trades, Strategy B has about a 58% chance of experiencing 10 or more consecutive losses, while for Strategy A it is under 1%.
- Under the same expected return, Strategy B has greater equity curve volatility and demands higher psychological tolerance from the trader.
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