In the financial industry, the payoff ratio is an important measure in portfolio management.

**The payoff ratio or the profit/loss ratio is the portfolio average profit per trade divided by the average loss per trade. In simple words, the payoff ratio is the ratio between the size of the win and the size of the loss. If we have higher values – the portfolio performance is better.**

The payoff ratio explanation video is below:

This is an important term when we talk about money management (visit our article about money management and expert advisors). The payoff ratio is not the same as the Sharpe ratio (Sharpe ratio is a measure of excess portfolio return over the risk-free rate relative to its standard deviation.)

## How to calculate the payoff ratio?

Average win = Total Gain/number of winning trades

Average loss = Total Loss/number of losing trades

**Pay off ratio = Average win / Average loss = (Total Gain / number of winning trades ) / (Total Loss / number of losing trades)**

## Example how we can calculate the payoff ratio for system or portfolio:

Our system or portfolio has :

300 winning trades

200 losing trades

Total gain is $9000

Total loss is $8000

than expected payoff forex ratio will be :

Average Win = Total Gain / number of winning trades = $9000 / 300 = 30

Average loss = Total Loss / number of losing trades = $8000 / 200 = 40

**Pay off ratio = Average win / Average loss = 30/40 = 0,75 **

What is a good payoff ratio? The payoff ratio above 0,8 is a very good ratio.

**About payoff ratio formula and other formulas **

We use the Literature payoff ratio when we want to calculate the winning rate or win rate.

**Win rate = Profit factor / (profit factor + payoff ratio)**

A very similar term is Expected Payoff where

Expected Payoff = Total Net Profit / Total Number of Trades.

## What payoff ratio can tell us about our portfolio?

It can tell us only about the risk-reward strategy, but **it can not give** us a nice explanation about our portfolio profitability.

We need to calculate average profitability per trade (APPT) or in math language Expectancy except for this value.

Average profitability per trade = (Probability of Win * Average Win) – (Probability of Loss * Average Loss).

So let we calculate Average profitability per trade for our case :

300 winning trades mean that from 500 trades, 300 are winning. Probability of Win = 300/500 = 60%

200 losing trades mean that from 500 trades, 200 are losing. Probability of loss = 200/500 = 40%

Total gain is $9000

Total loss is $8000

Average Win = Total Gain / number of winning trades = $9000 / 300 = 30

Average loss = Total Loss / number of losing trades = $8000 / 200 = 40

Average profitability per trade = (Probability of Win * Average Win) – (Probability of Loss * Average Loss) = 0.6*30 – 0.4*40 = $18 – $16 = $2

## Payoff ratio vs. Profit factor

The profit factor is a better signal than the payoff ratio. The payoff ratio can be meager, and the system can be profitable. The payoff ratio without a win rate can not be used as a measure.

So if we know that :

The profit factor is the ratio when we divide profit from winning trades by the loss of losers.

Win rate is the percentage of winning trades based on the number of total trades.

The payoff ratio is the average winning trade divided by the average losing trade.

There is a rule about Profit factor and payoff ratio :

**The profit factor will stay constant if we lower the payoff ratio only if we develop a higher win rate strategy. **

**Payoff ratio calculator **

One important thing that we need to separate is one of the most common questions in finance.

**Is the payout ratio the same as the payoff ratio? The payout ratio shows the proportion of earnings paid out as dividends to shareholders, and the payoff ratio is the portfolio average profit per trade divided by the average loss per trade.**