- This ratio refers to a trading system's ability to generate profits over losses. The profit/loss ratio is the average profit on winning trades divided by the average loss on losing trades over a specified time period.
This will give a better idea of how well trading systems are performing. The lower the number, the worse the system is at predicting future movements in stock prices. Many books advocate at least a 2:1 ratio. For example, if a system had a winning average of $400 per trade and an average loss over the same time of $240 per trade then your profit/loss ratio would be 5:3 or 1.67:1.
The profit/loss ratio can be an overly simplistic way of looking at performance because it fails to take into account an individual's risk tolerance or the probability of gains for each trade.
Investment dictionary. Academic. 2012.
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