What it is — Profit Factor
Profit factor is total winnings divided by total losses over a sample of trades. Above one means the system won more than it lost in aggregate. Traders use it beside expectancy because it is hard to fake and easy to compare across systems with different win rates and risk rewards.
Why it matters — Profit Factor
It punishes blow-up risk implicitly. A system with a high win rate can still post a poor profit factor when one loss wipes out ten wins. Costs matter here because spread and commission shrink winnings and deepen losses, so always compute it after costs, not on idealized fills.
One worked example
One hundred trades: gross winnings $8,000, gross losses $5,000. Profit factor is 1.6. Change one loss to a missed stop and losses jump — the number moves fast, which is exactly why it is useful as an early warning for any system. Compute it monthly and watch the trend line, not just the latest value.
Why beginners get this wrong
Beginners chase profit factor without costs, or they compute it over ten trades and declare victory. Both habits hide the truth. The fix is discipline: fixed sample windows, after-cost numbers, and the same rules every time.
Frequently asked questions — Profit Factor
What is a good profit factor?
Most system researchers look for 1.3 or higher after costs. Above 2 in live trading is rare and worth distrusting first.
Does profit factor ignore trade count?
Yes. Always read it beside the sample size. Ten trades prove little.
Related terms — Profit Factor
Related tools — Profit Factor
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