The payoff ratio compares the average result of winning trades with the absolute average result of losing trades:
payoff ratio = average win / |average loss|
If winning trades earn 150 on average and losing trades lose 100 on average, the payoff ratio is 1.5.
How to read the number
It is an ex-post measure calculated from closed trades over a stated period. It is not the risk/reward ratio planned before entry. It also omits win frequency: a high payoff ratio may still accompany a negative result when wins are too rare or when costs and slippage are excluded.
The convention for commissions, currency, breakeven trades and partial exits must remain consistent. The full Payoff ratio entry develops its relationship with win rate and expectancy.
Sources
- TradeStation Help, Ratio Avg. Win : Avg. Loss — Defines the ratio of average winning trade to average losing trade and states its treatment of configured commissions and slippage.
- MetaQuotes, MetaTrader 5 Help — Trading Report — Defines average profit and average loss from the closed trades in each group.