Payoff Ratio (Expectation)
Payoff Ratio* is sometimes referred to as the “Win/Loss Size Ratio”, or “Expectation”.
This ratio is simply the system’s average profit per trade divided by the average loss per trade. The higher the payoff ratio, the better the system.
To explain further, this is a ratio used by many traders to compare the expected return, to the amount of Capital at Risk undertaken to achieve these returns. The first number in the ratio would represent the average amount of risk in the trade. The second number is the potential reward of the trade (referring to the Avg. profit, to the Avg. loss per trade).
Example… if you risked an average of $100 per trade and your average profit is $175, then your Payoff Ratio would be, 1 to 1.75 (175 / 100), so the “expectation” in this scenario is — for every $1.00 Risked — a Reward of $0.75 would be earned in return.
Since trading is all about Reward-to-Risk, it would not be advisable to trade a system with a Payoff Ratio near 1, unless it had a (Win %) greater than 50%.
* Not to be confused with “Profit Factor”, which was present in TJS products prior to November, 2010. It is assumed, by the TJS creator and many feedback requests, that the “Payoff Ratio” best reflects the truer reality of a systems performance – moreso than Profit Factor – so it is now standard on all products.