Calculation and mechanics
First all gains are added up to the gross profit and all losses, as positive amounts, to the gross loss. The profit factor is the ratio of these two sums. With a gross profit of 15,000 and a gross loss of 10,000 it is 1.5.
The profit factor depends both on the win rate and on the size of winners and losers. A strategy with a 40% win rate whose winners are on average twice as large as its losers reaches a profit factor of 1.33. With a 70% win rate and winners on average only half as large as the losers, the result is only 1.17.
If there is not a single loss in the period, the profit factor is mathematically undefined because it would divide by zero. With few trades it can also be strongly influenced by single large gains or losses.
Profit factor = gross profit / gross loss
Distinction
The profit factor is a dimensionless ratio. If all trade results are scaled proportionally with the same position size, it stays unchanged. Different position sizes between individual trades can influence the profit factor, though.
Expectancy looks at the same trade results as an average amount per trade. Two strategies can therefore have the same profit factor but very different expectancies in the base currency, for example when one is traded with larger positions.
The profit factor says nothing about how the results developed over time. Whether losses were spread evenly or clustered in certain phases is shown, for example, by the Max drawdown.
Related terms
- Win rate (Hit rate, percent profitable)
- Expectancy (Average result per trade, expected value)
- Max drawdown (Maximum drawdown, MDD, time in drawdown)
- Sharpe ratio (Reward-to-variability ratio)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.