The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

THE HAnDbook of TECHnICAl AnAlysIs

expressing reward in terms of risk

We can express R/r in various ways. We can express the R/r ratio as a multiple of
$risk. This approach for expressing $Reward in terms of $risk was introduced by
Dr. Van Tharp in his book entitled Trade Your Way to Financial Freedom. Here
are some examples.

R r→3 2divide both sides by risk to express reward in term /$ $ ss of risk: (

R r

$ )

/ →( / ) : ( / )3 2 2 2 →1 5 1. :

We can therefore represent the R/r ratio as 1.5r. This means that $R is 1.5
times larger than $risk.

the Minimum Winning percentage

For every R/r ratio setup, there is a corresponding minimum %win or win ratio. In
ratio form, a %win of 40 percent becomes 40/100 = 0.4. So, a %win of 40 percent
corresponds to a win ratio = 0.4 Let $Reward be R, $risk be r and win ratio be w.
We already know that:

% % %

($

win loss

win ratio loss ratio

Expectancy R win ra

=−

=−

=×

100

1

ttio r loss ratio

R w r w

) ($ )

($ ) ($ ( ))

−×

=×−×− 1

To get the min win%, we set Expectancy = 0. Expressing $R in terms of $r
(i.e., dividing through by $r) we get (leaving out the $ sign):

( ) ( ( ))

( )

/ ( )

R w w

Rw w

w R

w R

×−×−=

−+=

+=

=+

1 1 0

1 0

1 1

1 1

This represents the minimum win ratio required to break even. From Figure 28.21,
we see that this minimum win ratio is non‐linear in nature.
See Figure 28.22 for more examples of calculating the minimum win ratio or
percentage.

figure 28.20 Techniques for Reducing Longer‐Term Risk.