What is the Win/Loss Ratio
The win/loss ratio is the ratio of the total number of winning trades to the number of losing trades. It does not take into account how much was won or lost, but simply if they were winners or losers.
Win/Loss Ratio = Winning Trades : Losing Trades.
Percentage-wise, it is simply calculated as Winning Trades/Losing Trades.
The win/loss ratio is also known as "success ratio."
Calculating a Win/Loss Ratio
The win/loss ratio is used mostly by day traders to assess their wins and losses. It is used with the win-rate, that is, the number of trades won out of total trades, to determine the probability of a trader’s success. A win/loss ratio above 1.0 or a win-rate above 50% is usually favorable. For example, if you made 30 trades of which 12 were winners and 18 were losers, your win/loss ratio would be 2:3. In percentage format, the win/loss rate is 12/18 = 2/3 = 0.67, which means that you are losing 67% of the time. Your win-rate, or probability of success, would be 12/30 = 40%.
The win/loss ratio is used to calculate the risk/reward ratio, which is 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 target price at which a profit will be made. The risk is measured using a stop-loss order on the trade and 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 price at $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.
Having a high win rate doesn't necessarily mean a trader will be successful or even profitable, as a high win rate means little if the risk-reward is very high, and high risk-reward ratio may not mean much if the win rate is very low.
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 2:1 means the trader has twice as many winning trades as losing. 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.