The win/loss ratio, also known as the success ratio, is a ratio of the number of profitable trades to unprofitable trades over a specified time period. The win/loss ratio is a commonly used trading metric by traders to evaluate their stock-picking success.
The win/loss ratio is a ratio of the number of profitable trades over unprofitable trades.
Achieving a high win/loss ratio does not necessarily indicate a successful trading strategy.
A win/loss ratio that exceeds 1 indicates that of the trades made, at least half were profitable.
Formula for the Win/Loss Ratio
To calculate the win/loss ratio, use the formula below:
Wins refer to the number of profitable trades over the specified period.
Losses refer to the number of unprofitable trades over the specified period.
Interpretation of the Win/Loss Ratio
The win/loss ratio is used solely to determine the ratio of successful trades to unsuccessful trades over a given period. A win/loss ratio that:
= 1.0 is viewed neutrally. It indicates that of the trades initiated, 50% were profitable.
> 1.0 is viewed favorable. It indicates that the trader had more successful trades than unsuccessful trades.
< 1.0 is viewed negatively. It indicates that the trader had more unsuccessful trades than successful trades.
It should be noted that achieving a high win/loss ratio does not necessarily indicate a successful trading strategy. It is discussed in the next section.
Key Limitation of the Win/Loss Ratio
Although the win/loss ratio is an easily calculable ratio to determine the success rate of trades, there is one key drawback: it does not consider the actual dollar amount in each trade.
The win/loss ratio only considers the number of trades and not the dollar amount of trades. A trader may have a favorable win/loss ratio but still have a losing trading strategy. For example, a trader may execute five trades, with four generating a total profit of $100 and the remaining generating a loss of $1,000. The win/loss ratio would be 4, but the trades in aggregate would have resulted in a net loss of $900.
To overcome the drawback mentioned above, traders may modify the win/loss ratio to instead consider the amount of gains and losses generated from trades rather than the number of successful/unsuccessful trading outcomes:
Background Information: John is a day trader who uses the win/loss ratio on each trading day to evaluate the success of his stock trading strategy. The following shows the number of his successful and unsuccessful trades over a five-day period:
Question: Calculate the win/loss ratio for each trading day.
Question: On day three, although John reported a win/loss ratio of 2.3, he actually lost money on that day. How is it possible?
Answer: The win/loss ratio only considers the number of trades and not the dollar amount involved with each trade. Although John had 70 profitable trades, the losses generated from the 30 unprofitable trades exceeded the gains from the profitable trades, resulting in a trading loss for that day.
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