Profit factor

Profit factor summarises a set of trades in one number:

• Profit factor = total of all winning trades ÷ total of all losing trades (losses taken as a positive number)

A value of 1.0 means the winners and losers cancelled out. Below 1.0, the losses were larger. Above 1.0, the winners were larger. It appears in the strategy tester reports of MetaTrader and in most backtesting and journal software.

Example

Illustrative figures from 50 trades recorded in a journal:

• 20 winners totalling $6,000
• 30 losers totalling $4,000
• Profit factor: 6,000 ÷ 4,000 = 1.5
• Net result: $2,000, or $40 a trade on average

Now include costs that the first calculation left out: spread and commission of $15 a trade on all 50 trades is $750. If those costs reduce each winner and increase each loser, gross winnings fall to $5,700 and gross losses rise to $4,450, giving a profit factor of about 1.28. Costs matter a great deal for strategies that trade often.

Points to keep in mind

• Sample size. A profit factor from 20 trades says very little. A few large winners can lift it a long way, and they may not repeat.
• Backtests flatter. Results from historical tests rarely include realistic slippage and variable spreads, and strategies are often tuned to the past data. Our guide to backtesting covers these traps.
• It hides the path. Two sets of trades with the same profit factor can have very different drawdowns. Look at it alongside expectancy and maximum drawdown.

Profit factor is a description of past results, not a prediction of future ones. Keeping a trading journal is the way to collect the data honestly.