Here is one way knowing your win rate can help you with position sizing (you can create a very simple excel formula for this as well) – let’s say my avg win rate is 80% for trades based on RS/RW. I’m looking at Stock XYZ , which is $50 a share (using easy numbers for the sake of math) – looking at the chart I know my mental stop on this stock is 48.50 (e.g. just below major support level). So I’m willing to lose 1.50 per share on the trade, Now I may exit sooner (i.e. XYZ loses RS), but currently it’s at 48.50. This puts my breakeven Risk|Reward at 50.375. If I did this trade 100 times, and 20 times took a loss at 48.50 but 80 times took profits at 50.375, I would be even. Ok, so now I know my profit target needs to be above 50.375. If I made the target 50.75, I would have a Reward ratio of 2:1 (e.g. after 100 trades of 1 share per trade if I lost 20% and exited at 48.50 but won 80% and exited at 50.75, I would lose $3 on the losers and make $6 on the winners).
September 26, 2022