Win/Loss Ratio
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 doesn't consider how much was won or lost, yet just assuming they were winners or failures.
The Formula for Win/Loss Ratio Is
The win/loss ratio can likewise be stated as winning trades : losing trades. The win/loss ratio is otherwise called the "achievement ratio."
What the Win/Loss Ratio Can Tell You
The win/loss ratio is utilized generally by day traders to survey their daily wins and losses from trading. It is utilized with the win-rate, or at least, the number of trades won out of total trades, to decide the likelihood of a trader's prosperity. A win/loss ratio above 1.0 or a win-rate above half is generally great.
Illustration of How to Use the Win/Loss Ratio
Expect that you have made 30 trades, of which 12 were winners and 18 were failures. This would make your win/loss ratio 12/18, which decreases to 2/3 or 2:3. In percentage design, the win/loss rate is 12/18 = 2/3 = 0.67, and that means that you are losing 67% of the time. Utilizing your total number of trades (30), your win-rate, or likelihood of achievement, would be 12/30 = 40%.
The win/loss ratio is utilized to work out the risk/reward ratio, which is the profit capability of a trade relative to its loss potential. The profit capability of a not entirely set in stone by the difference between the entry price and the targeted exit price at which a profit will be made. The trade is executed utilizing a stop-loss order set at the target exit price, and the not entirely set in stone by the difference between the entry point and the stop-loss price.
For instance, a trader purchases 100 shares of a company for $5.50 and places a stop loss at $5.00. The trader likewise submits a sell limit request 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, subsequently, ready to risk $0.50 per share to create a gain of $1.00 per share in the wake of 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 expected payoff. Assuming that the ratio is greater than 1.0, it means the risk is greater than the profit possible on the trade. In the event that the ratio is under 1.0, the profit potential is greater than the risk.
Having a high win rate doesn't be guaranteed to mean a trader will find success or even profitable, as a high win rate means nearly nothing if the risk-reward is exceptionally high, and high risk-reward ratio may not mean a lot on the off chance that the win rate is extremely low.
Limitation of the Win/Loss Ratio
Albeit the win/loss ratio is utilized to decide the achievement rate and likelihood of future progress of stock traders, it isn't exceptionally helpful all alone on the grounds that it doesn't consider the monetary value won or lost in each trade.
For instance, a win/loss ratio of 2:1 means the trader has two times however many winning trades as losing. Sounds great, however on the off chance that the losing trades have dollar losses three times as large as the dollar gains of the winning trades, the trader has a losing strategy.
Highlights
- The win/loss or achievement ratio is a trader's number of winning trades relative to the number of losing trades.
- All in all, the win/loss ratio tells how frequently a trader will have fruitful, money-production trades relative to how often they'll lose money in his trades.
- The win/loss ratio, utilized with the win ratio (wins/total trades) can be utilized in the Kelly Criterion formula to compute the maximum percentage of a trader's account ought to be risked on any one trade.
