If you’ve rubbed elbows with day traders, you've probably heard the term “win/loss ratio” thrown around. It’s what it sounds like: the ratio of winning trades to losing trades, which can be changed to a percentage (winning trades / losing trades).
The larger your win/loss ratio, the more successful a day trader you are. If you’re at 1, your wins and losses are the same (one divided by one, as the AP Calc exam demos). Being greater than 1 means you’re winning more than you’re losing. For instance, if you did 50 trades with 26 wins and 24 losers, you’d have a win/loss ratio of 26/24, or 13/12, or 1.083333333 (the 3’s go forever). So much winning.
The win/loss ratio is more of a scoreboard than it is a reflection of the gains from the wins and losses, since the win/loss ratio doesn’t take into account how much money was won or lost per trade. It can help day traders calculate their risk/reward ratio, which gets into the math of whether a trade is a good idea or not, which does take into account potential wins and losses. The risk/reward ratio helps a trader weigh the potential gains if they win the trade against the potential losses if they lose the trade.
So the win/loss ratio itself doesn’t mean much if you’re trying to judge whether a day trader is “successful” or not. Lots of winning in trades doesn’t necessarily mean lots of gains. Next time you hear a day trader bragging about their win/loss ratio, ask them about their net gains. Or don’t—no need to make frenemies out of friends.