# CRV and Hit Rate: What Every Trader Needs to Know

If you want to make money short-term trading in the stock market, you should take a closer look at the risk-reward ratio (CRV) and the hit rate, as well as the correlation between the two variables.

To Risk-Reward Ratio (CRV) indicates how large the possible gain is in relation to the possible loss. For example, a CRV of 2 means that the profit from success is twice the loss from loss. With a CRV of 1, the potential gain and the potential loss are exactly the same. With a CRV of 0.5, the potential gain is only half of the potential loss. A concrete CRV cannot be specified in advance for all trades. This is especially true if it is not clear from the start at which level the trader will exit in the event of a loss (stop loss) or in the event of a profit (take profit). In such cases, however, one can calculate an average CRV over many similar trades. An average CRV of 2 means that the gains are on average twice the losses.

The second elementary goal of a trading setup or strategy is hit rate. The hit rate is the probability of winning. A hit rate of 50% means there is a win half the time. A hit rate of 25% means that only a quarter of all trades end in profit. Contrary to what many beginners believe, a trading strategy with a hit rate of less than 50% can be profitable. Losses then occur in most trades, but the profits from winning trades can be so large in proportion that they can more than compensate for the many small losses.

CRV and hit rate are strongly negatively correlated with each other. This means that a high CRV is usually associated with a low hit rate and a high hit rate with a low CRV.

trend-following approaches often have a low hit rate but a high CRV: Although many trades end in losses, a few trades produce such large profits that they ideally more than compensate for the many small losses.

Too countercyclical rebound strategies the opposite is true: these strategies often have a relatively high hit rate but a poor CRV. Many trades end in profit, but the profit per trading is small compared to the (rather rare) losses.

Special caution is required with strongly asymmetric strategies with a very high hit rate and a very low CRV. These strategies give small profits on almost every trade and only very rare losses, which can then be huge. Here, to the untrained observer, the strategy looks like a money printing machine. In truth, however, the risk of a total loss always lurks over the trader. Such a strategy was presumably implemented in the strategy in the following diagram (source: Wikifolio). Many small and regular gains are punctuated by few but huge losses that occur very rarely.

The following two tables show the so-called expected value of profit for trades with different hit rates and CRVs. It is assumed that there is only one winning and one losing scenario, which is characterized by the hit rate and the probability. It is assumed that one euro is risked in each case and that the CRV is won as an amount in euros in the case of a win or lost in euros in the case of a loss. With a CRV of 1, one euro is won in the event of a win and one euro is lost in the event of a loss. The table shows the average profit per trade when a large number of trades are executed with the appropriate combination of hit rate and CRV.

The expected value of profit given in the tables indicates how much a trader would earn or lose per invested euro if he executed many similar trades with the corresponding hit rate and the corresponding CRV.

If a trader executes many trades with a hit rate of 50% and a CRV of 1 (potential profit equals potential loss), the bottom line is that he neither wins nor loses anything (expected value of profit is 0). However, if the trader has discovered a strategy where he is right 52.5% of the time and wrong 47.5% of the time, if the CRV is 1, he will earn an additional 5 cents per trade. bet dollar in the long run.

In reality, there are hardly any strategies or setups where the expected value deviates extremely from 0. For example, a trading strategy with a 95% hit rate and a CRV of 1 is pure fiction, as is a CRV of 4 with a 50% probability. On the other hand, with a CRV of 1, a hit rate of just over 50% is sufficient to achieve long-term profit with many similar trades, as long as you don’t take too many risks.

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