What is profit factor?
The short answer
Profit factor is your gross profit divided by your gross loss over a set of trades. A profit factor above 1.0 means that set of trades made money overall. Below 1.0 means it lost money. It answers one question: for every dollar you lost, how many dollars did you make?
It is one of the most honest numbers in trading because it weighs the size of your wins and losses, not just how often you win. A trader can be right most of the time and still lose money if the few losses are large.
How do you calculate profit factor?
The short answer
Add up every winning trade to get gross profit. Add up every losing trade to get gross loss. Divide the first by the second. That ratio is your profit factor.
Say a month of trades looks like this:
By the numbers
- Gross profit: +$4,800
- Gross loss: -$3,000
- Profit factor: 1.6
A profit factor of 1.6 means the sample contains +$1.60 in gross profit for every -$1.00 in gross loss. It describes that sample only. It does not establish what the next trade or period will produce.
Data note
A profit factor is only as trustworthy as the sample behind it. Ten trades can produce a wild number by luck. Look for a meaningful sample before you draw conclusions about your edge.
Why can profit factor matter more than win rate?
The short answer
Win rate tells you how often you win. Profit factor tells you whether winning those times actually pays. A 70% win rate can still lose money if the 30% of losses are large enough.
Consider two traders:
| Trader | Win rate | Profit factor | Outcome |
|---|---|---|---|
| A | 70% | 0.9 | Loses money |
| B | 40% | 1.7 | Makes money |
Trader A wins more often and still loses, because the losses dwarf the wins. Trader B is wrong more than half the time and still grows, because the wins are larger and the losses are controlled. That control is risk management, the real strategy.
Being right often is not the same as being profitable.
Questions traders ask
Why should you distrust a small or heavily tested sample?
The short answer
Testing many variations can make a historical result look stronger by chance, so read profit factor with the sample and testing process.
Testing many strategy variations can make an impressive historical result appear by chance. Profit factor should therefore be reviewed with the sample and testing process, not treated as a standalone promise. See the original research paper, The Probability of Back-Test Over-Fitting, by David Bailey and coauthors.
Take it with you
- Profit factor = gross profit ÷ gross loss.
- Above 1.0 made money; below 1.0 lost money.
- A high win rate can still lose if losses are large.
- Judge it over a meaningful sample, not a handful of trades.