A profit/loss ratio is a measure of the ability of a particular trading system to generate profit instead of losses. A system’s profit/loss ratio is calculated by taking the average profit from all winning trades divided by the average losses on all losing trades over a specified period. The profit/loss ratio measures how a trading strategy or system is performing. Obviously, the higher the ratio the better. For example, if a system had a winning average of $1,250 per trade and an average loss over the same period of $250 per trade, then the profit/loss ratio would be 5:1. That means that if you lose 4 trades you have to win 1 trade to be breakeven (17% breakeven win rate%). That doesn't sound bad at all. In contrast, if a system had a winning average of $250 per trade and an average loss over the same period of $750 per trade, then the profit/loss ratio would be 1:3. That means that if you lose 4 trades you have to win 12 trade to be breakeven (75% breakeven win rate%).
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