What Is the Win/Loss Ratio?
The win/loss ratio for traders is the total number of winning trades compared to the total number of losing trades in a specific period of time, such as a trading session.
It does not take into account how much was won or lost, but simply the number of trades that made money versus the number of trades that lost money.
The win/loss ratio is also known as the success ratio.
Key Takeaways
- The win/loss, or success ratio, is a trader's number of winning trades divided by the number of losing trades.
- The win/loss ratio can indicate how many times a trader will have successful, money-making trades relative to how many times they'll have money-losing trades.
- The win/loss ratio doesn't take into account the amounts of money that trades made or lost.
- Traders can use the win/loss ratio to rate the success of a trading strategy.
- The win/loss ratio and the win rate (wins/total trades) can be used to determine the probability of being profitable.
The Formula for the Win/Loss Ratio
Win/lossratio=LossesWins
The win/loss ratio can also be stated as winning trades : losing trades.
What the Win/Loss Ratio Can Tell You
The win/loss ratio is used mostly by day traders to assess their daily wins and losses from trading and as a way to gauge the success of the trading strategy that they used.
For example, if the win/loss ratio shows more wins than losses, then they might continue using their current strategy, all other things being equal. If the ratio shows more losses than wins, they might review and fine-tune their trading strategy to address why they had those losses.
The win/loss ratio is often used with the win rate, which is the number of trades that make money out of the total number of trades conducted. Together, the win/loss ratio and the win rate can help traders understand the probability of their trading being profitable.
How to Interpret a Win/Loss Ratio
- A win/loss ratio of more than 1.0 means that a trader had more winning trades than losing trades.
- A win/loss ratio of less than 1.0 means that a trader had more losing trades than winning trades.
- A win/loss ratio equal to 1.0 means that a trader had the same number of winning trades as losing trades.
Active traders should make it a habit to regularly review their win/loss ratios, risk/reward ratios, and win rates to stay on top of their trading efforts and avoid losing too much money. Essentially, win/loss ratios and win rates can alert you to how often you are winning or losing money on your trades.
Example of the Win/Loss Ratio
Assume that you made a total of 30 trades, of which 12 were winners and 18 were losers. This would make your win/loss ratio 12/18, which equals 0.67. Such a ratio means that you are losing 67% of the time. Using the benchmarks above, .67 is less than 1.0 and an indication of a less-than-winning strategy.
Along with that figure, the win rate, or probability of success, is 12/30, or 40%.
Incorporating the Risk/Reward Ratio
The risk/reward ratio indicates the profit potential of a trade relative to its loss potential. The profit potential of a trade is determined by the difference between the entry price and the targeted exit price (at which a profit will be made).
The trade is executed using a stop-loss order set at the target exit price, and the profit is determined by the difference between the entry point and the stop-loss price.
For example, a trader purchases 100 shares of a company for $5.50 and places a stop loss at $5.00. The trader also places a sell limit order to execute when the price hits $6.50. The risk on the trade is $5.50 - $5.00 = $0.50, and the potential profit is $6.50 - $5.50 = $1.00. The trader is, thus, willing to risk $0.50 per share to make a profit of $1.00 per share after closing the position.
The risk/reward ratio is $0.50/$1.00 = 0.5. In this case, the trader’s risk is half of his potential payoff. If the ratio is greater than 1.0, it means the risk is greater than the profit potential on the trade. If the ratio is less than 1.0, then the profit potential is greater than the risk.
Together, the win/loss ratio and the risk/reward ratio can provide a trader with a good idea of their trading success and risk profile. For example, these ratios can help them determine whether they should temporarily stop trading due to lack of successful trades and financial losses or keep trading based on positive results.
In addition, having a high win rate (again, winning trades/total trades) doesn't necessarily mean a trader will be successful or even profitable if the risk-reward ratio is very high. And a high risk-reward ratio may not mean much if the win rate is very low.
Limitation of the Win/Loss Ratio
Although the win/loss ratio is used to determine the success rate and probability of future success of stock traders, it is not very useful on its own because it does not take into account the monetary value won or lost in each trade.
For example, a win/loss ratio of 2:1means the trader has twice as many winning trades aslosing. Sounds good, but if the losing trades have dollar losses three times as large as the dollar gains of the winning trades, the trader has a losing strategy.
What Does the Win/Loss Ratio Imply?
The win/loss ratio can indicate performance success as a trader and a probability of future success. It can also point to the effectiveness (or lack thereof) of trading strategies.
Is a High Win/Loss Ratio Good?
Generally, yes. It means that there were more trades that made money than trades that lost money. Bear in mind, though, that it says nothing about the amounts of money made or lost. For instance, you may have 15 winning trades and five losing trades for a positive win/loss ratio of 3.0. However, those five losing trades may have cost you more than the 15 winning trades made you.
What Is the Win/Loss Ratio if I Have Zero Losses?
In such a case, you wouldn't bother to calculate a win/loss ratio (or any other ratio) because dividing a number by zero results in an undefined result.
The Bottom Line
For traders, the win/loss ratio compares the number of trades that made money to the number of trades that lost money in a given trading session. It has nothing to do with the amount of money made or lost by those trades.
It's used by traders to get an idea of the success of their trading efforts for that session, which, in turn, can help them decide whether to stick with a particular trading strategy or devise a new one.
