Trading realityUpdated 2 min readBy the FXNOD team
Profit factor in trading: formula and what is a good value
Profit factor is the total money won on winning trades divided by the total money lost on losing trades. Above 1 means the method made money over the period, and below 1 means it lost. Between about 1.2 and 2 over several hundred trades is a realistic good result. A very high figure on a small sample usually signals luck or overfitting.
The formula
Profit factor equals gross profit divided by gross loss. If your winning trades total 1,500 and your losing trades total 1,000, the profit factor is 1.5: you made 1.50 for every 1 lost. It can also be written as win rate times average win, divided by loss rate times average loss.
Reading the value
| Profit factor | Meaning |
|---|---|
| Below 1.0 | The method lost money |
| 1.0 | Break even, before any costs not included |
| 1.1 to 1.3 | A thin edge. Costs or a change in conditions can erase it |
| 1.3 to 2.0 | A solid result, if the sample is large |
| Above 2.5 | Excellent, or more often a small sample, curve fitting or hidden risk |
A worked example
| Method | Win rate | Average win | Average loss | Profit factor |
|---|---|---|---|---|
| A | 40% | 2.5 | 1.0 | 1.67 |
| B | 60% | 1.0 | 1.0 | 1.50 |
| C | 90% | 0.1 | 1.0 | 0.90 |
Method C wins nine trades in ten and loses money. Profit factor exposes what the win rate hides.
Its blind spots
- It says nothing about drawdown. Two methods with the same profit factor can have very different worst periods.
- It ignores how the result was distributed. One huge win can carry a poor method.
- Open losing positions are not counted, which flatters grid and Martingale systems.
- On a small sample it is mostly noise.
Using it properly
Calculate it over at least a hundred trades
Several hundred is better.
Include every cost
Spread, commission and slippage.
Read it beside maximum drawdown
Return and pain together.
Recalculate without the largest win
If it falls below 1, the result depended on one trade.
With bots
A recovery bot can show a very high profit factor for a long time, because its rare large loss has not occurred yet. Treat any bot's profit factor as unproven until the sample includes its worst case.
Questions people ask
- What is a good profit factor?
- Between about 1.3 and 2 over a large number of trades. Higher figures on few trades deserve suspicion.
- Is profit factor better than win rate?
- Yes, because it includes the size of wins and losses. Read it with drawdown.
- Can profit factor be negative?
- No. It is a ratio of two positive totals. Below 1 means a net loss.
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