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.