Payoff ratio in gold trading
The payoff ratio is the average winning trade divided by the average losing trade; with the win rate it decides whether a gold strategy makes money.
Also called Average win to average loss, Win/loss ratio, Reward ratio
The payoff ratio compares the size of the average win to the size of the average loss, measured after the trades are closed. A payoff ratio of 2.0 means winners are, on average, twice as large as losers. It differs from the planned risk-reward ratio because it reflects what actually happened, including early exits and slippage.
How it applies to gold trading
Win rate and payoff ratio pull against each other. Tight targets on gold raise the win rate but lower the payoff ratio; wide targets do the opposite. The break-even win rate for any payoff ratio is 1 ÷ (1 + payoff). At a payoff of 1.0 you need to win more than 50%; at 2.0, more than 33%; at 3.0, more than 25%.
Comparing the planned risk-reward with the realized payoff ratio in your journal is revealing. If you plan 1:3 trades but your payoff ratio is 1.4, you are cutting winners early, letting losers run past the stop or both.
Worked example
Example (hypothetical numbers): over a month your gold winners averaged $240 and losers $160. Payoff ratio = 240 ÷ 160 = 1.5. Break-even win rate = 1 ÷ 2.5 = 40%. With a 46% win rate, expectancy is 0.46 × 240 − 0.54 × 160 = $24 per trade.
A common mistake
Looking at the win rate alone. A 75% win rate with a payoff of 0.25 loses money; a 35% win rate with a payoff of 2.5 makes it.
See also: Win rate, Risk-reward ratio, Expectancy, Profit factor.
Frequently asked questions
What payoff ratio do I need to be profitable?
It depends on your win rate. Break-even win rate equals 1 divided by (1 plus the payoff ratio). At a 2.0 payoff you need to win just over a third of trades.
Why is my payoff ratio lower than my planned risk-reward?
Usually because winners are closed early, losers slip past the stop or partial closes shrink the average win. A journal shows which.