Profit/Loss Ratio

What is the 'Profit/Loss Ratio'

The profit/loss ratio refers to a trading system's ability to generate profits over losses. The profit/loss ratio is the average profit on winning trades divided by the average loss on losing trades over a specified time period.

Profit/Loss Ratio

BREAKING DOWN 'Profit/Loss Ratio'

This will give a better idea of how well trading systems are performing. The lower the number, the worse the system is at predicting future movements in stock prices. Many books advocate at least a 2:1 ratio. For example, if a system had a winning average of $400 per trade and an average loss over the same time of $240 per trade then your profit/loss ratio would be 5:3 or 1.67:1.

The profit/loss ratio can be an overly simplistic way of looking at performance because it fails to take into account an individual's risk tolerance or the probability of gains for each trade.

RELATED TERMS
  1. Risk Graph

    A two-dimensional graphical representation that displays the ...
  2. Combined Ratio

    A measure of profitability used by an insurance company to indicate ...
  3. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
  4. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained ...
  5. Profitability Ratios

    A class of financial metrics that are used to assess a business's ...
  6. Accounting Ratio

    A way of expressing the relationship between one accounting result ...
Related Articles
  1. Forex Education

    The Myth Of Profit/Loss Ratios

    Determine whether your trading approach is only profitable on paper.
  2. Active Trading Fundamentals

    Tips For Controlling Investment Losses

    A profit/loss plan helps investors recognize mistakes and invest logically, rather than emotionally.
  3. Active Trading Fundamentals

    Beginner Trading Fundamentals: Limiting Risk

    Managing risk is the most important thing you do as a trader. Here we discuss probability and strategies for limiting trading risk.
  4. Trading Systems & Software

    Interpreting A Strategy Performance Report

    These key performance metrics will help you decide if your trading strategy is a winner.
  5. Investing Basics

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  6. Options & Futures

    Options Risk Graphs: Visualizing Profit Potential

    With a single diagram, you can see how price, time and volatility affect potential gains.
  7. Forex Education

    Risk Can Be Predetermined; Reward Is Unpredictable

    Develop a logical, intelligent approach to currency trading based on 10 key rules.
  8. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
  9. Fundamental Analysis

    Analyze Investments Quickly With Ratios

    There are four categories of financial ratios: profitability, liquidity, solvency and valuation.
  10. Trading Strategies

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
RELATED FAQS
  1. What is the difference between efficiency ratios and profitability ratios?

    Learn about efficiency and profitability ratios, what these ratios measure and the main difference between efficiency and ... Read Answer >>
  2. How do stock dividends affect the retained earnings account?

    Understand the difference between financial ratio analysis and accounting ratio analysis. Learn why ratio analysis is important ... Read Answer >>
  3. What is the difference between the loss ratio and combined ratio?

    Learn about the loss ratio and combined ratio, what the two ratios measure and the main difference between the loss ratio ... Read Answer >>
  4. Which financial metrics are best for analyzing companies in the chemicals sector?

    Learn about some of the key financial metrics that investors and market analysts commonly use to evaluate companies in the ... Read Answer >>
  5. To what extent should you take a company's liquidity ratio into account before investing ...

    Find out how important it is for an investor to know a company's liquidity ratio before deciding to invest, and why relying ... Read Answer >>
  6. How do I use ratios to perform a financial analysis?

    Learn which ratios are used in fundamental analysis. Find out how analysts measure company performance and financial health ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center