Profit factor
Family III · Risk
Not to be confused with floating profit and loss, realized profit and loss, unrealized profit and loss.
Profit factor is a performance statistic that divides the sum of all profitable trade results by the absolute sum of all losing trade results. It measures how many units of profit are generated for every unit of loss, without regard to the number of trades or the size of the account. A value above one indicates that gross profits exceed gross losses; a value below one indicates the opposite.
Calculation
The profit factor is computed as:
- Profit factor = Gross profit ÷ Gross loss
Gross profit is the sum of all positive trade outcomes (before commissions, fees, or financing costs, unless those are included in the trade results). Gross loss is the sum of all negative trade outcomes, expressed as a positive number. The ratio is undefined when gross loss is zero, and it is zero when gross profit is zero. Because it uses only the totals, the profit factor does not reveal the distribution of wins and losses, the number of trades, or the sequence in which they occurred.
Worked example
The result of 2.00 means that for every unit of currency lost, two units were gained. A profit factor of 1.00 represents a break-even strategy before costs; a value below 1.00 represents a net loss.
Interpretation and limitations
A higher profit factor generally indicates a more profitable strategy, but the figure is sensitive to the period chosen and to the inclusion or exclusion of costs. A strategy with a high profit factor may still have a low total profit if the gross amounts are small, and a strategy with a low profit factor may be profitable if it trades frequently. The profit factor is often compared with other metrics such as the win rate and the average win/loss ratio, which together describe the same outcomes from different angles. Because it is a ratio of sums, it can be distorted by a single unusually large win or loss.
Often confused with
- floating profit and loss
- Floating profit and loss is the unrealised gain or loss on open positions, calculated from the current market price against the entry price, and it changes continuously until the position is closed.
- realized profit and loss
- Realized profit and loss is the net gain or loss from closing a position, calculated from the entry and exit prices after fees, and is no longer affected by subsequent market moves.
- unrealized profit and loss
- Unrealized profit and loss is the gain or loss on an open position measured against the current market price, which remains changeable until the position is closed.