Risk management is the process of managing (read as reducing) the risk of a trade so that it is more likely to be profitable. Professional traders know that risk management is one of the most important aspects of trading, but it is often overlooked by new traders to their detriment (e.g. their blown up trading account).
The win to loss ratio is one of the risk management ratios that are used to determine if a trading system is likely to be consistently profitable. Specifically, the win to loss ratio is a comparison of how many profitable trades to how many losing trades, a trading system or trader makes. For example, a win to loss ratio of 20:10 would indicate that a trader makes 20 profitable trades for every 10 losing trades. This ratio could also be given as 2:1, or as 200% (calculated as ((20 / 10) * 100) = 200), meaning that there are twice as many profitable trades as there are losing trades.
Higher win to loss ratios mean that a trading system or trader is making more profitable trades than losing trades. If this is combined with a low risk to reward ratio, a trader is more likely to be consistently profitable. For example, a win to loss ratio of 200% means that a trader is making two profitable trades for every one losing trade. With a risk to reward ratio of 50% (i.e. the risk is half of the potential profit), a trader would make four times more profit than loss (i.e. they would keep 75% of their profit).
The win to loss ratio is often used in combination with some of the other risk management ratios, such as the risk to reward ratio (which compares the amount of profit and loss), and the break even percentage (which gives the number of winning trades that are required to break even). By correctly calculating and comparing the risk management ratios, a trader can see if their trading system has the potential to be profitable.
