The Performance Metrics table is located on the All Trades page. The statistics shown on this table provide valuable information about how the strategy has performed in the past and gives investors critical insights into how we think about our investment strategy.
The column titled W/L Ratio (or win/loss ratio) is the most important column on the table as this is the summation of all the data presented. The W/L Ratio incorporates the percentage of trades that are profitable (or the win %), the average gain of those profitable trades and the average loss of the losing positions and is calculated using the following equation:
W/L Ratio = (average gain x % of winning trades) / (average loss x % of losing trades)
The result is a mathematical representation of our strategy’s edge.
For instance, if the ratio is 1.25, the strategy has made $1.25 for every $1 risked. If the ratio is below 1, for example, 0.75, the approach is only making 75 cents for every $1 risked. The idea is to keep the ratio as high as possible – ideally over 2 – to maintain a healthy edge.
Notice that for a strategy to have a high win/loss ratio does not rely on the strategy winning on every trade. Far from it. Many successful trading strategies rely on making money on between 45%-55% of trades, which means that you need to be comfortable with being wrong. It also means that you need to keep your losses small on average, and your winners need to be more significant to achieve a healthy edge in your investment strategy.
Using this concept is precisely how we think about our strategy. We understand that we’re not going to make money on every trade and therefore, to maintain a profitable investment strategy, we maintain stringent risk controls. Our approach incorporates strict selling rules that allow us to realise losses to keep average losses low. Conversely, we tend to let our winners run their course as long as the trend remains favourable.
In this way, our strategy tends to make more money when we win then we give up when we lose, which ultimately results in a healthy W/L Ratio or edge.