Risk to Reward Ratio & Kelly Criterion

Professional Trading Risk Management Tools

Break-Even Win Rate Calculator

Risk to Reward Ratio:

Break-Even Win Rate:

Expected Value per Trade:

Analysis:

Break-Even Win Rate Required

R:R Ratio Break-Even Win Rate (%)

Expected Value per Risk Unit

Win Rate
Formulas:
• R:R Ratio = Reward / Risk
• Break-Even Win Rate = 1 / (1 + R:R) × 100
• Expected Value = (Win Rate × Reward) - (Loss Rate × Risk)
Profitable (EV > 0)
Break-even (EV ≈ 0)
Unprofitable (EV < 0)

Understanding the Kelly Criterion

The Kelly Criterion is a mathematical formula used to determine the optimal size of a bet or investment to maximize long-term growth while managing risk.

The Formula

Kelly % = (Win Rate × Reward/Risk) - Loss Rate) / (Reward/Risk)

Or simplified: Kelly % = (W × R - L) / R

Where: W = Win probability, L = Loss probability (1-W), R = Reward/Risk ratio

⚠️ Important: Most professional traders use only 25-50% of the Kelly percentage to avoid excessive volatility and drawdowns.
Kelly Criterion Calculator

Full Kelly Percentage:

Half Kelly (Recommended):

Quarter Kelly (Conservative):

Position Sizing:

Key Takeaways

  • Never use full Kelly - It leads to wild swings and emotional stress
  • Half Kelly is standard - Used by most professional traders
  • Quarter Kelly for beginners - More conservative, smoother equity curve
  • Negative Kelly = Don't trade - Your edge is negative or non-existent

How Multiple Trades Affect Your Risk:Reward

Taking multiple trades simultaneously or frequently impacts your overall risk management and expected returns.

Key Concepts:

  • Diversification Effect: Multiple uncorrelated trades reduce overall portfolio volatility
  • Correlation Risk: Multiple correlated trades amplify both gains and losses
  • Capital Allocation: More trades mean smaller position sizes per trade
  • Risk of Ruin: Taking too many trades increases probability of significant drawdowns
Golden Rule: Your total portfolio risk should not exceed 2-5% per day, regardless of number of positions.
Portfolio Risk Calculator

Total Portfolio Risk:

Effective R:R Ratio:

Recommendation:

The Truth About Returns: Why More Trades Often Mean Smaller Profits

If you've ever wondered why day traders chase 1-2% gains while long-term investors target 50-100% returns, this graph tells the whole story. It's not about skill alone—it's about the mathematical relationship between trade frequency and expected reward per trade.

What This Graph Shows

The red curve illustrates a fundamental principle: as the number of trades increases, the average return per trade decreases. This isn't a flaw in strategy—it's the nature of markets and probability.

For Investors: Patience Pays Off

When you take fewer trades, you're giving yourself room to capture larger moves. Think about Warren Buffett holding Coca-Cola for decades or a real estate investor waiting years for property appreciation.

  • Higher returns per position: 50%, 100%, even 500% gains are possible when you hold quality assets long enough
  • Requires conviction: You need to be right about your thesis and have the patience to let it play out
  • Fewer decisions = fewer mistakes: You avoid the noise and emotional swings of frequent trading
Investor Trap: Exiting too early. If your long-term analysis is sound and nothing fundamental has changed, resist the urge to sell during temporary dips.

For Traders: Consistency Over Home Runs

If you're taking 10, 20, or 100+ trades a month, you're playing a different game. Your edge comes from small, repeatable wins—not trying to catch the next 10x stock.

  • Target 1-3% per trade: Small gains add up when you trade frequently and consistently
  • Focus on probability: With more trades, you need a higher win rate and tight risk management
  • Discipline is everything: Cut losses quickly, take profits at targets, and stick to your system
Trader Trap: Chasing big wins. If you're a frequent trader trying to catch 20-30% moves, you're likely overholding losers and underholding winners.

Why This Happens: The Math Behind It

Markets are efficient over shorter timeframes. The more you trade:

  • The more you compete with algorithms and professionals
  • The more transaction costs (fees, slippage, taxes) eat into profits
  • The less time you give each position to develop its full potential

Conversely, with fewer trades, you can afford to be more selective, wait for high-conviction setups, and let time work in your favor through compounding and fundamental growth.

Finding Your Style

Ask yourself:

  • Do I have the patience to hold through volatility? → Consider fewer, larger trades
  • Do I prefer daily action and quick feedback? → Accept smaller per-trade returns
  • Can I stick to a system without emotional interference? → This matters more than trade frequency

Risk Management Always Comes First

Whether you're a trader or investor, never risk more than 1-2% of your capital per position. More trades don't mean you should risk more total—it means you split that risk across more opportunities.

Universal Rule: Your total portfolio risk at any time should not exceed 5-10%, regardless of how many positions you hold.

Final Thoughts

There's no "better" path—only what fits your personality, time availability, and risk tolerance. Day traders can make consistent income with disciplined execution. Long-term investors can build serious wealth with patience and research.

The key insight: Respect the relationship between trade frequency and expected reward. Don't be a trader chasing investor-sized gains, or an investor getting shaken out by trader-sized noise.

Success in either approach requires:

  • Clear rules and strategy
  • Disciplined execution
  • Proper risk management
  • Emotional control
  • Realistic expectations aligned with your trade frequency

Master your style, respect the math, and the returns will follow.