For example, if an individual trades a total of 10 times and has won 7 of those trades, their win rate is 70% (7/10). The formula for win rate is always the number of winning trades divided by the total number of trades. In calculating their win rate, traders are able to determine if their strategy is working or not.
In addition to the win rate, traders also use the win-loss ratio to track their performance. Unlike the win rate, the win-loss ratio takes into consideration the number of wins relative to the number of losses.
For example, in a total of 20 trades, you win 12 and lose 8. Your win-loss ratio would be 1.5 (12/8). Your win rate, however, would be 60% (12/20 x 100). However, as with our previous example, having a win-loss ratio greater than 1.0 does not guarantee success.
It’s worth noting that a high win rate doesn’t always mean profitable success. Being profitable depends on other factors, one of which can be the risk/reward ratio. Even if you have a high percentage win rate, you may still be unprofitable if your stop losses are too large. This, in effect, negates the many smaller wins. The opposite case is also possible.
Traders often can tell their win rate from previous activity, meaning it can be easy to figure out a suitable risk reward ratio for their future trading.
For traders who have a high win ratio, their risk-reward ratio can be lower to break even. For traders with a low win ratio, their risk-reward ratio must be higher to break even.
If you are someone who likes to have a high win rate, your risk-reward can be lower. This means that you might want to engage in lower-risk activities like investing in treasury bonds.
A measure used in order to assess the efficiency of an investment. The ratio between net profit and net cost.
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