Profit Factor

1. What is Profit Factor

Profit factor is total profit divided by total loss over a period. A profit factor of 1.5 means for every 1 lost you make 1.5 — total profit is 1.5× total loss.

2. Why it matters

• A quick read of a strategy's overall health: > 1 profits, < 1 loses, = 1 breaks even.
• It complements expectancy: profit factor looks at the "total profit / total loss" level, easy to compare across systems.

3. How to calculate & read

Profit Factor = Total profit (winning trades) ÷ Total loss (losing trades, absolute value)

Rough reading: near 1.0 is the profit/loss border; higher is healthier; but a very high number on a small sample often signals overfitting or an untested bad period.

4. How to apply

• Compute on a large enough sample; read it beside max drawdown for the full picture (healthy but high drawdown is still hard to follow).
• Use it to compare strategies, but don't pick purely by the highest profit factor — weigh stability too.

5. Worked example

A strategy with $300k total profit and $200k total loss → profit factor 1.5. Another with profit factor 3.0 but based on just 15 trades and 50% max drawdown → the 3.0 is less reliable and harder to follow than the stable 1.5.

6. Common mistakes

• Trusting a high profit factor on a small sample.
• Reading profit factor apart from drawdown and trade count.
• Overfitting to push a pretty backtest profit factor.

7. FAQ

• What profit factor is good? Above 1 profits; the "good enough" level depends on style and stability — the point is durability across periods.
• How is it different from expectancy? Expectancy is the average per trade; profit factor is the total-profit / total-loss ratio. Two complementary views.

8. Tools

• A performance stats sheet (profit factor, expectancy, max DD together).

9. Checklist

• ☐ Is profit factor computed on a large enough sample?
• ☐ Do I read it beside drawdown and trade count?
• ☐ Is the number stable across periods?