How to calculate your average win and average loss, why their ratio matters as much as your win rate, and how to improve it.
Your win rate tells you how often you win. Your average win and average loss tell you how much. The ratio between the two, sometimes called the payoff ratio, is half of your edge, and for many traders it is the half that needs the most work.
Average win = Total profit from winning trades ÷ Number of winning trades
Average loss = Total loss from losing trades ÷ Number of losing trades
Payoff ratio = Average win ÷ Average loss
Example: 60 winners totaling $9,000 and 40 losers totaling $8,000.
With a 60% win rate and a 0.75 payoff ratio, expectancy is 0.6 × $150 − 0.4 × $200 = +$10 per trade. Positive, but thin. See expectancy.
The break-even win rate for any payoff ratio is 1 ÷ (1 + ratio). See risk-reward ratio.
Averages can hide outliers. Check your largest win and largest loss. If your largest loss is five times your average loss, a few disasters are dragging your results down. If your largest win is a big share of total profit, your results depend on rare events.
Shrink losses:
Grow wins:
In R-multiples, a disciplined trader's average loss should be close to −1R. If yours is −1.4R, there is easy money to recover by fixing exits. See R-multiples.
Average win, average loss, largest win and loss and the payoff ratio are shown on the statistics page for any set of filtered trades, along with the full P&L distribution.
Maximum adverse excursion (MAE) and maximum favorable excursion (MFE) reveal whether your stops are too tight and whether you exit winners too early. Here is how to use them.
How the Calmar ratio compares annual return with maximum drawdown, how to calculate it, what good values look like and when it is more useful than the Sharpe ratio.
What the System Quality Number is, how to calculate it from your R-multiples, how to read the scores, and the pitfalls of using it on small samples.
