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Definition
Represents the average profit on winning trades divided by the average loss on losing trades.
Formula
Profit/Loss Ratio = Average Profit per Winning Trade / Average Loss per Losing Trade
Example
Let’s say you made the following trades over a month:
- Trade 1: Profit of $300
- Trade 2: Loss of $100
- Trade 3: Profit of $250
- Trade 4: Loss of $150
Here’s how you’d calculate the profit/loss ratio:
- Total Profit: $300 + $250 = $550
- Average Profit per Winning Trade: $550 / 2 = $275
- Total Loss: $100 + $150 = $250
- Average Loss per Losing Trade: $250 / 2 = $125
- Profit/Loss Ratio: $275 / $125 = 2.2
This ratio of 2.2 means that, on average, your winning trades are generating 2.2 times more profit than your losing trades.
Key Points
- Strategy Effectiveness: Helps assess how well your trading strategy manages risk and generates profits.
- Target Setting: Many traders aim for a ratio of at least 2:1, meaning their winning trades generate at least twice the profit of their losing trades.
