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Payoff ratio

Win rate and payoff ratio are the two halves of the same sentence. Quote either alone and you have said nothing; quote both and you have said whether the method makes money.

3 min read

The formula

payoff ratio = average win ÷ |average loss|

Both averages are taken over closed trades, net of costs. A payoff ratio of 2 means the typical winner is twice the size of the typical loser.

The number is useless in isolation and decisive in company. Paired with win rate it tells you whether the method is profitable, because those two figures together are exactly what expectancy is built from:

expectancy = (win rate × avg win) − (loss rate × |avg loss|)

The break-even question

A trade that closes at exactly zero is neither a win nor a loss. It has to go somewhere, and the choice changes the ratio:

  • Counted as a loss — it drags the average loss towards zero, which raises the payoff ratio. A trader who scratches trades aggressively would look like they cut losses brilliantly.
  • Counted as a win — it drags the average win down and lowers the ratio.
  • Excluded from both — the averages describe only the trades that resolved.

Ours excludes it. In our implementation a trade contributes to the win side only when net P&L is strictly above zero and to the loss side only when it is strictly below, so a scratch appears in the trade count and in neither average. The same rule is used for win rate, which keeps the two numbers consistent — they describe the same set of decisive trades.

This matters more than it sounds. On a scalping account where a meaningful share of trades are exited flat, the three conventions can produce payoff ratios that differ by 20% or more from the same file.

Planned risk-reward is a different number

The most common misreading is treating the payoff ratio as your risk-reward ratio. They measure different things:

  • Risk-reward is a plan: the distance to the target divided by the distance to the stop, decided before the trade.
  • Payoff ratio is a result: what the winners and losers actually averaged.

They are equal only if every winner reaches full target and every loser reaches full stop. Nobody trades that way. In practice the realised ratio sits below the planned one, and the size of the gap is a measurement of one specific habit — taking profit early while letting losses run to the stop.

If your plan is 3:1 and your file says 1.4, the plan is not the problem; the exits are. That gap is what the intent versus execution analyzer reads out of your own statement, using the stop and target levels the broker recorded.

What it hides: it is a mean

Both halves of the ratio are arithmetic means, so both inherit their tails. One enormous winner lifts the average win and the payoff ratio with it, and the ratio then describes that trade rather than the method.

Two quick checks before trusting it:

  • Compare the average win against the best trade. If the best trade is many multiples of the average, the mean is being carried.
  • Run the remove worst trades analyzer and look at its mirror — it strips the largest winners as well as the largest losers, which is the fastest way to see how much of your ratio rests on a handful of rows.

What counts as good

There is no threshold, because the ratio only has meaning against your win rate. The break-even pairing is:

break-even win rate = 1 ÷ (1 + payoff ratio)
  • Payoff 0.5 → you need to win 67% of the time.
  • Payoff 1.0 → you need 50%.
  • Payoff 2.0 → you need 33%.
  • Payoff 3.0 → you need 25%.

Those are the costs-included break-evens for the averages you actually produced, not targets. The break-even win rate calculator does this pairing for your own two numbers, and the honest question is never "is my payoff ratio good" but "does my win rate clear the line this payoff ratio sets".

More in Trading terms, defined by how they are computed

  • Net P&LThe result of a trade after commission and swap, and why the sign convention in broker exports makes double-counting so easy.
  • Profit factorGross profit divided by gross loss, the edge case that breaks it, and why a high profit factor on few trades means almost nothing.
  • ExpectancyThe expected value of one trade, the break-even win rate it implies, and why the figure needs an error bar to mean anything.
  • R-multipleExpressing results as multiples of the amount risked, why it survives account growth, and the case where R stops being comparable.
  • Win rateWhat share of trades finished positive, how break-even trades are counted, and why the figure is uninterpretable without the win-to-loss ratio.
  • Maximum drawdownThe largest peak-to-trough fall in your account, and the measurement choice that decides whether a prop account survives.
  • Trailing drawdownA loss limit that rises with your account and usually never falls back, plus the two sentences in a rulebook that decide when it can end your account.
  • Consistency ruleA cap on how much of your profit may come from a single day or trade, why it exists, and how it turns a winning account into an unpayable one.
  • SQN (System Quality Number)Mean R divided by the standard deviation of R, multiplied by the square root of the sample, and the two reasons the score is not comparable between accounts.
  • Sharpe ratioMean daily result divided by its standard deviation and annualised, plus the three assumptions that make a trading journal's Sharpe different from a fund's.
  • Sortino ratioDownside deviation instead of total deviation, the two competing conventions for computing it, and which one our implementation uses.
  • Average holding timeHow long a typical trade stays open, why open positions are excluded from the average, and the reason a disposition-effect account reports a short one.