What Is the Win/Loss Ratio?
For traders, the win/loss ratio is the total number of winning deals divided by the total number of losing trades for a specific time frame, such as a trading session.
It just considers the number of transactions that gained money compared to the number of deals that lost cash without accounting for winnings or losses.
The success ratio is another name for the win/loss ratio.
The Formula for the Win/Loss Ratio
Wins minus Losses = Win/loss ratio
Win/loss percentage = Losses
Gains
Another way to express the win/loss ratio is as winning trades: losing deals.
What the Win/Loss Ratio Can Tell You: Day traders primarily utilize the win/loss ratio to evaluate their daily gains and losses from trading and determine the efficacy of their trading strategy.
If, for instance, the ratio indicates a higher number of victories than defeats, they may stick with their present approach, all other things being equal. They may analyze and adjust their trading technique if the ratio indicates more losses than gains to address the reasons behind their losses.
The win rate, or the proportion of profitable trades about all transactions made, is frequently used with the ratio. The victory rate and the win/loss ratio, when combined, might aid traders in understanding the likelihood that their trades will turn a profit.
How to Understand a Ratio of Win/Loss
- A trader with a win/loss ratio greater than 1.0 makes more winning deals than losing ones.
- A trader with a win/loss ratio of less than 1.0 has made more losing deals than winning ones.
- A win/loss ratio equal to 1.0 suggests that a trader has the same number of winning deals as losing ones.
Active traders should habitually analyze their ratios, risk/reward ratios, and win rates to keep up with their trading efforts and prevent losing too much money. In essence, win rates and win/loss ratios tell you how often you make money on your trades and how much you lose.
An illustration of a win/loss ratio
Let’s say you completed 30 deals, with 12 winning trades and 18 losing ones. Your win/loss ratio is 12/18 or 0.67. With such a ratio, you lose around 67% of the time. .67 is less than 1.0 using the previously mentioned criteria, indicating a less-than-successful method.
In addition to that number, the likelihood of success, or win rate, is 12/30, or 40%.
Including the Ratio of Risk to Reward
The risk/reward ratio shows how much money a deal has the potential to make compared to how much it might lose. The difference between the entry price and the desired exit price—the point at which a profit is expected—determines a trade’s potential for profit.
The profit is calculated as the difference between the entry point and the stop-loss price. The transaction is executed using a stop-loss order established at the desired exit price.
For instance, a trader may pay $5.50 for 100 corporation shares and set a stop loss at $5.00. In addition, the trader sets up a sell limit order that will be executed at $6.50. The trade has a $5.50 minus $5.00 = $0.50 risk and a $6.50 minus $5.50 = $1.00 potential profit. Therefore, to close the position at a profit of $1.00 per share, the trader is willing to risk $0.50 per share.
The ratio of risk to reward is $0.50/$1.00, or 0.5. The trader’s risk in this scenario is equal to half of his possible reward. The danger of the deal outweighs the likely reward if the ratio is higher than 1.0. The profit potential exceeds the risk if the ratio is less than 1.0.
A trader may understand their risk tolerance and trading performance by combining the win/loss and risk/reward ratios. These ratios, for instance, may assist them in deciding whether to continue trading based on profitable outcomes or to temporarily halt trading owing to a lack of good deals and financial losses.
Furthermore, even if a trader has a high win rate (winning trades or total transactions), this does not guarantee success or even profitability if the risk-reward ratio is high. Furthermore, a high risk-reward balance could not imply anything if the win rate is meager.
Restriction of the Win/Loss Percentage
The win/loss ratio could be more helpful since it does not account for the monetary value earned or lost in each transaction, even though it is used to estimate the success rate and chance of future success of stock traders.
For instance, a trader with a 2:1 win/loss ratio has twice as many winning deals as losing ones. Sounds nice. However, the trader has a losing strategy if the dollar losses from the losing transactions are three times more than the profit from the winning deals.
What Does the Win/Loss Ratio Imply?
The win/loss ratio may provide insight into a trader’s performance and predict future success. It may also indicate if trading techniques are successful or not.
High Win/Loss Ratio: Is It Good?
In general, sure. It indicates that a more significant transaction resulted in more profits than losses. But remember that it does not mention how much money is gained or lost. For example, you can have a good win/loss ratio of 3.0 if you have 15 winning transactions and five losing ones. But you could have lost more money on the five unsuccessful transactions than on the fifteen profitable ones.
What Is the Win/Loss Ratio If I Have Zero Losses?
In such a circumstance, you wouldn’t bother to compute a win/loss ratio (or any other ratio), since dividing a number by zero results in an undefined result.
The Final Word
The win/loss ratio is a tool traders use to compare the quantity of profitable trades to the quantity of losing transactions during a trading session. The amount of money gained or lost from those trades is irrelevant.
Traders use it to gauge the effectiveness of their trading efforts for that trading session, which helps them decide whether to continue using a specific trading strategy or develop a new one.
Conclusion
- The number of winning trades a trader makes divided by the number of losing trades is known as the win/loss or success ratio.
- The win/loss ratio can show the proportion of profitable trades a trader makes compared to the number of unsuccessful trades.
- The money that trades make or lose is not factored into the win/loss ratio.
- The win/loss ratio is valuable for traders to assess a trading strategy’s effectiveness.
- To calculate the likelihood of making money, one can use the win/loss ratio and the win rate, which is the number of wins overall.
