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. Combined Ratio

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

    The current ratio is a liquidity ratio measuring a company's ...
  3. Profitability Ratios

    A class of financial metrics that are used to assess a business's ...
  4. Comprehensive Income

    The change in a company's net assets from nonowner sources over ...
  5. Activity Ratios

    Accounting ratios that measure a firm's ability to convert different ...
  6. Cash Return On Assets Ratio

    A ratio used to compare a businesses performance among other ...
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. Options & Futures

    Options Risk Graphs: Visualizing Profit Potential

    With a single diagram, you can see how price, time and volatility affect potential gains.
  6. Investing Basics

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  7. Stock Analysis

    Sony Corporation and More Big Movers in Consumer Cyclical on September 17, 2012

    The market is having a bad day so far. The Nasdaq is trading down 0.2%; the S&P 500 is down 0.2%; and the Dow has slipped 0.2%. The consumer cyclical sector is a category of stocks that relies ...
  8. Stock Analysis

    American Capital Agency Corp. and Other Real Estate Operations Stocks Making Big Moves

    The market is currently up, with the Nasdaq moving up 1%, the S&P 500 rising 0.5% and the Dow increasing 0.6%. The Real Estate Operations sector (IYR) is relatively unchanged on a good day ...
  9. Stock Analysis

    Expedia and More Big Movers on the Nasdaq on September 21, 2012

    This morning, the Nasdaq has moved little, the S&P 500 has decreased 0.3% and the Dow has been relatively flat. The recent surge in popularity of technological stocks has launched the Nasdaq ...
  10. Stock Analysis

    Today's Major Technology Sector Movers: SMI and More

    This morning's trading has marked a bad day for the market so far. The Nasdaq has declined 1.9%; the S&P 500 has fallen 1.3%; and the Dow has slipped 1.1%. The technology sector is a category ...
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. 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 >>
  3. 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 >>
  4. 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 >>
  5. A portfolio hedge is purchased in the form of a spread ...

    Free info on financial certification exams including study guides, exam questions, and much more! Read Answer >>
  6. What role does ratio analysis play in valuing a company?

    Learn about the role of ratio analysis in determining company value, including some of the most common ratios used by modern ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center