Understanding Trading Win/Loss Ratio: Definition, Formula, and Examples

What Is the Win/Loss Ratio?

The win/loss ratio compares the number of winning trades to losing trades. The ratio helps traders see how successful their strategy is. Traders often use it with the win rate to determine a trade's overall profitability. While it is a useful measure, the win/loss ratio doesn’t show how much money is actually gained or lost.

Calculating the Win/Loss Ratio: A Simple Guide

$\text{Win/loss ratio} = \frac{\text{Wins}}{\text{Losses}}$Win/loss ratio=LossesWins​

The win/loss ratio can also be stated as winning trades : losing trades.

Insights From the Win/Loss Ratio in Trading

The win/loss ratio is used mostly by day traders to assess their daily wins and losses from trading and as a way to gauge the success of the trading strategy that they used.

For example, if the win/loss ratio shows more wins than losses, then they might continue using their current strategy, all other things being equal. If the ratio shows more losses than wins, they might review and fine-tune their trading strategy to address why they had those losses.

The win/loss ratio is often used with the win rate, which is the number of trades that make money out of the total number of trades conducted. Together, the win/loss ratio and the win rate can help traders understand the probability of their trading being profitable.

Understanding and Interpreting Win/Loss Ratios

• A win/loss ratio of more than 1.0 means that a trader had more winning trades than losing trades.
• A win/loss ratio of less than 1.0 means that a trader had more losing trades than winning trades.
• A win/loss ratio equal to 1.0 means that a trader had the same number of winning trades as losing trades.

Example of Calculating Win/Loss Ratio 

Let's say you made 30 trades: 12 won, and 18 lost. This would make your win/loss ratio 12/18, which equals 0.67. Such a ratio means that you are losing 67% of the time. Using the benchmarks above, .67 is less than 1.0 and an indication of a less-than-winning strategy.

Along with that figure, the win rate, or probability of success, is 12/30, or 40%.

Integrating Win/Loss and Risk/Reward Ratios for Success 

The risk/reward ratio shows a trade's profit potential compared to its loss potential. The profit potential of a trade is determined by the difference between the entry price and the targeted exit price (at which a profit will be made).

Traders use a stop-loss order at the target exit price, and profit is the difference between the entry point and 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 order 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, 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, which equals 0.5, meaning the risk is half of the 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.

Together, the win/loss ratio and the risk/reward ratio can provide a trader with a good idea of their trading success and risk profile. For example, these ratios can help them determine whether they should temporarily stop trading due to lack of successful trades and financial losses or keep trading based on positive results.

In addition, having a high win rate (again, winning trades/total trades) doesn't necessarily mean a trader will be successful or even profitable if the risk-reward ratio is very high. And a high risk-reward ratio may not mean much if the win rate is very low.

Recognizing the Limitations of Win/Loss Ratios

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 2:1 win/loss ratio means there are twice as many wins as losses. 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.

The Bottom Line

The win/loss ratio helps traders see how often they win compared to how often they lose. But it doesn't tell them how much money they win or lose. Traders can use it to evaluate their strategies and make changes, but should combine it with the risk/reward ratio and win rate for better success. A high win/loss ratio doesn’t guarantee profit if losses are bigger than gains, so it shouldn’t be the only measure traders rely on. Regularly reviewing these metrics can help traders make smarter, more adaptable decisions.