Trading systems terminology
Trading systems have their own terminology. Some of the terms that it consists of seem to be more important than other. Probably the most important ones are those that define the parameters charecterizing the systems quality. The definitions of the most basic of such parameters are listed below. Understandably, they apply to both stock and futures trading systems.
Profit Factor - is the total of profits divided by the total of losses for a given sample of trades. For example, if the total profits are $10,000 and the total losses are $5,000, the profit factor in such a case is 10000/5000 or 2.0. The bigger this number is the better the system quality.
Win/Loss Ratio - is the average profit per trade divided by the average loss per trade for a given sample of trades. For example, if the average profit per trade is $60 and the average loss per trade is $40, the win/loss ratio is 60/40 or 1.5. The bigger this number is the better the system quality.
Win Ratio - also referred to as "the win frequency," is the percentage (fraction) of trades that are winners in a given sample of trades. For example, if 60 trades out of the sample of 100 are winners, the win ratio (frequency) is 60%. The bigger this percentage is the better the system quality.