How to Calculate Win loss Ratio and Use it

The win loss ratio calculates how often a trading system is profitable vs. how often it loses money. All trading systems will have both wins and losses so it is important to know what to expect.

You calculate win loss ratio by using the following formula.

(Number of Winning Trades) / (Number of Losing Trades)

If a trading system won 5 trades and lost 5 trades it would have a win to loss ratio of 1:1. So each trade would have a 50% chance of being profitable.

It is important to remember that this ratio is not the only factor in determining how profitable a system is. It is also important to calculate how much it wins when you are right vs. how much it loses when it is wrong.

So for instance if it wins 40% of the time but wins $2 when it is right and only loses $1 when it is wrong then it can still be very profitable. This is why it is important to keep your losses short, because the less you lose when you are wrong vs. the more you make when you are right, the less often you will have to be right in order to be profitable.