Stop-losses, risk-to-reward & expectancy
You can be wrong more often than right and still come out ahead — if your losses are small and your wins are bigger.
Builder · 10 min · Updated 2026-11-08
💡 A shop's returns policy
A good shop accepts that some products will be returned. It limits the damage with a clear policy, and makes sure the products it does sell earn more than the returns cost. A stop-loss is your returns policy: a small, pre-agreed cost when an idea does not work out.
Where to place a stop-loss
- Structure stop: just beyond the swing low/high, support/resistance zone or pattern extreme that proves your idea wrong.
- Volatility stop: a multiple of ATR (Average True Range), e.g. 1.5–2× ATR from entry, so normal noise does not stop you out.
- Best practice: use structure first, then check that the distance is at least ~1× ATR. If the structure stop is too far for your risk budget, reduce size — or skip the trade.
- Avoid: stops at exact round numbers or obvious levels where everyone else's stops cluster; random fixed percentages unrelated to the chart.
Risk-to-reward (R:R)
R:R = (Target − Entry) ÷ (Entry − Stop). A trade risking $10 to make $25 is 1 : 2.5. We call the risk "1R". A win of 2.5R means you made 2.5 times what you risked.
Win rate needed to break even
| R:R | Break-even win rate |
|---|---|
| 1 : 1 | 50% |
| 1 : 1.5 | 40% |
| 1 : 2 | 33% |
| 1 : 3 | 25% |
Formula: break-even win rate = 1 ÷ (1 + reward/risk). Fees and slippage push it a little higher.
Expectancy: the number that matters
Expectancy (R) = Win% × Avg win (R) − Loss% × Avg loss (R)
Example: 45% wins averaging +2R, 55% losses averaging −1R → 0.45 × 2 − 0.55 × 1 = +0.35R per trade. Over 100 trades risking 1%, that is roughly +35% before costs. A strategy with a 75% win rate but average wins of +0.5R and losses of −2R has expectancy 0.75 × 0.5 − 0.25 × 2 = −0.125R — it loses money despite "winning" most of the time.
Stop-loss rules
- Decide it before entry. Write it down.
- Never move it further away.
- Move it to break-even or trail it only by a pre-written rule.
- Accept that stops will sometimes be hit just before price turns. That is the price of insurance.
🧮 Practical example: structure + ATR stop
Key takeaways
- Stops go beyond structure, with at least ~1× ATR of room.
- R:R = reward ÷ risk; aim for ≥ 1 : 2.
- Break-even win rate = 1 ÷ (1 + R:R).
- Expectancy, not win rate, decides results.
- Never widen a stop.
Education only — not financial advice.