Definition in one sentence: the payoff ratio is the ratio between the average winning trade and the average losing trade — it measures the relative size of what you win against what you lose.
The formula, and what it measures
average gain ÷ average lossA payoff ratio of 2 means a winning trade earns on average twice what a losing trade costs. It is the other half of the equation the win rate does not capture: the win rate says how often you win, the payoff ratio says how much you win when you win.
How to read it with the win rate
Together they determine the break-even threshold. With a payoff ratio of 2, you only need to win a little more than one trade in three to break even. With a payoff ratio of 0.5 (losses twice as big as gains), you need to win two trades in three just to avoid losing.
- High payoff + moderate win rate → typical of trend following (rare big gains).
- Low payoff + high win rate → typical of 'scraping' strategies (many small gains, rare big losses — fragile).
The synthesis of the two is expectancy.
The classic mistake
Looking at the payoff ratio without the win rate, or vice versa. In isolation, neither tells you whether the strategy is profitable. A payoff of 3 is useless if you only win one trade in ten; a win rate of 80% is dangerous if each loss wipes out ten gains.
At Sextant
Sextant is a transparent quant platform: payoff ratio, win rate and expectancy are shown together, never one without the others. It is the only honest way to judge a system. The public logbook and the methodology detail these calculations, real costs included.
Frequently asked questions
What is a good payoff ratio?
It depends on the associated win rate. With a payoff ratio of 2, winning one trade in three is enough to break even. A high payoff compensates a low win rate, and vice versa. What matters is the combination of the two, summarised by expectancy.
What is the difference from the risk/reward ratio?
The risk/reward ratio is set in advance on a trade (target gain vs accepted risk). The payoff ratio is measured after the fact across all executed trades (average gain realised vs average loss realised). The latter reflects what actually happened.
Can you be profitable with a low win rate?
Yes, provided a high enough payoff ratio. It is the classic trend-following profile: you often lose small amounts and rarely win, but big. Expectancy stays positive.