Profit/Loss Ratio

AAA

DEFINITION of 'Profit/Loss Ratio'

This 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

INVESTOPEDIA EXPLAINS '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. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  2. Stock

    A type of security that signifies ownership in a corporation ...
  3. Profit

    A financial benefit that is realized when the amount of revenue ...
  4. Risk/Reward Ratio

    A ratio used by many investors to compare the expected returns ...
  5. Trade

    A basic economic concept that involves multiple parties participating ...
  6. Close Position

    Executing a security transaction that is the exact opposite of ...
RELATED FAQS
  1. Under what circumstances would someone enter into a repurchase agreement?

    In finance, a repurchase agreement represents a contract between two parties, where one party sells a security to the other ... Read Full Answer >>
  2. Is there a way to include intangible assets in book-to-market ratio calculations?

    The book-to-market ratio is used in fundamental analysis to identify whether a company's securities are overvalued or undervalued. ... Read Full Answer >>
  3. What types of corporations would be expected to have higher growth rates than more ...

    Investors looking for corporations with higher-than-average growth rates have several factors to consider. Although younger ... Read Full Answer >>
  4. What tax implications are there for parties involved with a reverse repurchase agreement?

    A reverse repurchase agreement – sometimes referred to as a reverse repo – is the purchase of an asset with a simultaneous ... Read Full Answer >>
  5. What happens if a software glitch fails to execute the strike price I set?

    If you've ever suffered the frustrating experience of having an order not filled or had a strike price fail to execute because ... Read Full Answer >>
  6. Are so-called self-offering and self-management covered by "Financial Instruments ...

    As the Financial Services Agency (FSA) explains, self-offering of interests in collective investment schemes falls under ... Read Full Answer >>
Related Articles
  1. Active Trading Fundamentals

    Tips For Controlling Investment Losses

    A profit/loss plan helps investors recognize mistakes and invest logically, rather than emotionally.
  2. Options & Futures

    Losing To Win

    Adopting realistic expectations is essential to staying in the trading game.
  3. Active Trading Fundamentals

    Money Management Using The Kelly Criterion

    Not sure how to determine your equity allocations? Read about a system that can help.
  4. Active Trading

    10 Steps To Building A Winning Trading Plan

    It's impossible to avoid disaster without trading rules - make sure you know how to devise them for yourself.
  5. Forex Education

    The Myth Of Profit/Loss Ratios

    Determine whether your trading approach is only profitable on paper.
  6. Investing Basics

    Explaining Idiosyncratic Risk

    Idiosyncratic risk is the risk inherent in a particular investment due to the unique characteristics of that investment.
  7. Investing

    Prospering In The Next Bear Market: Here's How

    Prepare to survive, and even prosper, in the impending bear market, by considering and putting into action the following four strategies.
  8. Stock Analysis

    3 Stocks To Buy and Hold For the Rest of 2015

    One of the dominant themes to consider for 2015 is the normalization of monetary policy as the Fed raises interest rates.
  9. Economics

    Greece Isn’t The Only Problem U.S. Stocks Face

    Both stocks and bonds fell last week, due to several factors dampening investor sentiment. The most obvious one is the evolving situation in Greece.
  10. Investing Basics

    What Does Spot Price Mean?

    Spot price is the current price at which a security may be bought or sold.

You May Also Like

Hot Definitions
  1. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  2. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  3. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  4. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  5. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  6. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!