Profit Factor: Formula, Examples and Its Limits

Profit factor is gross profit divided by gross loss. Add up every winning trade, add up every losing trade as a positive number, and divide. Above 1 means the winners outweighed the losers in total, exactly 1 is break-even, and below 1 means the losers were bigger. It is easy to compute and it hides more than it shows, as the lists below make plain.

The formula

Profit factor = gross profit ÷ gross loss, with both in the same unit: R, or money in one currency. Costs belong inside each trade's result before you add up, so a trade that gained 3 pips and paid 4 pips of spread is a loss. Profit factor counts size as well as frequency: one large loss can outweigh many small wins in the denominator.

Four lists, four disagreements

These are made-up trade lists in R, to show that profit factor, win rate and expectancy do not rank strategies the same way. This is arithmetic, not advice.

• P wins 70% of the time and has a profit factor of 1.17, which looks comfortable. Its expectancy is only +0.05R a trade, so a cost of 0.05R per trade takes it to zero.
• Q wins one trade in four and sits at exactly 1.00: break-even, whatever the win rate suggests.
• R wins less often than P, 40% of the time, and has the higher profit factor (1.33) and the higher expectancy (+0.20R).
• S has the highest profit factor on the page, 6.00, from 4 trades. One more loss moves it, so the number carries almost no information. Profit factor does not know how many trades produced it; see how many trades are enough.

Profit factor and expectancy are linked: expectancy = (profit factor − 1) × loss rate × average loss. For list R that is (1.33 − 1) × 0.60 × 1.00 = +0.20R, the same +0.20R as the table. A profit factor above 1 and an expectancy above 0 are the same statement; they differ in what else they tell you, and in whether they are in units you can act on. Expectancy reads in R per trade. Profit factor reads as a ratio.

One list, one trade that carries it

Here are 20 made-up results in R, in the order they happened: −1.0, −1.0, +2.5, −1.0, −1.0, −1.0, +0.8, −1.0, −1.0, +1.2, −1.0, −1.0, +9.0, −1.0, +0.6, −1.0, −1.0, +1.5, −1.0, −1.0.

With every trade, profit factor is 1.11: 15.6R ÷ 14.0R. Take out the one +9.0R result and it falls to 0.47, with an expectancy of −0.39R a trade. The whole positive result rested on one trade. That is not a reason to throw the trade away; it is a reason to compute the figure both ways whenever one result is much larger than the rest.

What profit factor cannot tell you

• It ignores sample size. Four trades and four hundred can give the same ratio.
• It is sensitive to outliers. One large winner, or one large loser, can swing it, as above.
• It says nothing about the path. Two lists with the same profit factor can have very different losing runs and drawdowns. Read it beside the maximum drawdown.
• There is no universal good number. Above 1 after costs is the only line the formula draws. Anything higher depends on the market, the number of trades and how you size.

How to compute your own

1. List every closed trade with its result after costs, in R or in one currency.
2. Sum the winners; sum the losers as a positive number.
3. Divide, then compute it again without your single best trade.
4. Put the expectancy and the trade count next to it, always.

We're working on a free journal and a backtester, with no date yet. Today Trepeat is a trade copier for MT4, MT5 and cTrader, currently on demo accounts, and you can add notes, a grade and screenshots to any copied trade once it closes, with a calendar of your results.

The journal exports to Excel (.xlsx) and does not calculate profit factor, expectancy or any other metric today, so the sums above run in a spreadsheet on that export. See the journal documentation. Defined terms are in the glossary, and the metrics overview shows where this one sits.

Written by the Trepeat team.