What is profit factor?
Profit factor is a trading performance measure. It compares your gross profit with your gross loss to assess a strategy's overall performance.
The higher the ratio, the more profitable the strategy over the period analysed.
Profit factor formula
Here's the formula:
Profit factor = Gross profit / Gross loss
For example, with 3,500 in gross profit and 2,000 in gross loss, your profit factor is 1.75.
How should you interpret your result?
- Below 1: a losing strategy overall
- Between 1 and 1.3: low, fragile profitability
- Between 1.5 and 2: generally a solid result
- Above 2: very good, but confirm it with a large sample
Profit factor needs to be considered alongside other measures such as the Sharpe ratio, drawdown, risk/reward and position size to give a full picture of a strategy's performance.