A trader on your desk sizes every idea the same way: the stop sits 1 point below entry and the target 2 points above it, so each trade risks 1 to make 2. Ignore commissions and slippage. What fraction of these trades has to reach the target rather than the stop for the strategy to break even over a large number of trades?
- A. 25.0%
- B. 50.0%
- C. 33.3%Correct
- D. 66.7%
Takeaway. A payoff ratio only tells you the hit rate you need: the breakeven probability is the risk divided by the sum of the risk and the reward.
