Profit Factor
Gross profits divided by gross losses -- a quick gauge of whether winners outweigh losers in absolute terms.
What is Profit Factor?
Profit factor is the ratio of how much a strategy made on its winning trades to how much it lost on its losing trades. It answers a simple question: for every dollar lost, how many dollars were gained?
A profit factor above 1 means the strategy made more than it lost. A profit factor below 1 means it lost more than it made. A profit factor of exactly 1 means it broke even -- total gains equaled total losses.
How It's Calculated
In plain English: add up all the returns from winning trades, then add up all the returns from losing trades. Divide total wins by the absolute value of total losses. The result is profit factor.
Worked Examples
A strategy executes 5 trades with the following returns:
+4%, +2%, +6%, -3%, -5%
Step 1: Sum the winning returns:
4 + 2 + 6 = 12
Step 2: Sum the losing returns and take the absolute value:
abs(-3 + -5) = abs(-8) = 8
Step 3: Divide:
profit factor = 12 / 8 = 1.5
For every 1% lost, the strategy gained 1.5%. Total gains were 50% larger than total losses.
A strategy executes 10 trades. 8 are winners with an average gain of +1.5%, and 2 are losers with an average loss of -8.0%.
Sum of wins:
8 * 1.5 = 12.0
Sum of losses (absolute value):
abs(2 * -8.0) = abs(-16.0) = 16.0
Profit factor:
profit factor = 12.0 / 16.0 = 0.75
Despite winning 80% of its trades, this strategy's total losses exceeded its total gains. The 2 large losses (-8% each) outweighed the 8 small wins (+1.5% each).
A strategy executes 10 trades. 3 are winners with an average gain of +8.0%, and 7 are losers with an average loss of -2.0%.
Sum of wins:
3 * 8.0 = 24.0
Sum of losses (absolute value):
abs(7 * -2.0) = abs(-14.0) = 14.0
Profit factor:
profit factor = 24.0 / 14.0 = 1.71
Despite winning only 30% of its trades, total gains were 71% larger than total losses. The 3 large wins (+8% each) more than compensated for the 7 small losses (-2% each).
Reading Your Results
Profit factor is a ratio. Higher values are better.
Things to Watch Out For
Profit factor ignores trade count
A strategy with 2 trades and a strategy with 200 trades can both have a profit factor of 1.5. The one with more trades provides a more reliable estimate. A single lucky win can inflate the profit factor when the sample is small. See Statistical Significance & Trade Count and Timeframes & Data for guidance on how many trades you need for reliable metrics.
Profit factor ignores the order of trades
Profit factor sums all wins and all losses regardless of when they occurred. A strategy that won consistently throughout the backtest and one that lost heavily before recovering at the end could produce the same profit factor. It does not capture the path the equity curve took -- for that, look at max drawdown.
Leverage does not change profit factor
If your strategy uses leverage, both wins and losses are amplified. At 2x leverage, a +4% win becomes +8% and a -3% loss becomes -6%. However, because both sides of the ratio scale by the same leverage factor, the profit factor itself does not change -- unless leverage causes a portfolio wipeout, which removes subsequent trades from the calculation. Simula calculates profit factor for each leverage level separately.
Related Metrics
Win Rate & Expectancy -- win rate measures how often you win; expectancy measures the average per-trade outcome. Profit factor measures the ratio of total gains to total losses. These three metrics complement each other.
Risk-Reward Ratio -- compares the average loss size to the average win size on a per-trade basis. Profit factor compares the totals instead of the averages, so it accounts for how many wins and losses there were.
Total and Annualized Return -- the overall result of the strategy. Profit factor explains the ratio of gains to losses that produced that result.