Profit Factor
In short
Ratio of gross profits to gross losses — above 1.0 means profitable
If all your winning trades added up to £3,000 and all your losing trades added up to £2,000, your profit factor is 1.5. It means for every £1 you lost, you made £1.50. Above 1.0 = making money. Below 1.0 = losing money. Simple as that.
Profit factor is the ratio of gross profits to gross losses across all trades. It provides a single number that captures both win rate and reward-to-risk ratio. A profit factor of 1.0 means breakeven. Values above 1.5 indicate a robust strategy, while values above 2.0 are considered excellent. Unlike Sharpe ratio, profit factor is intuitive and doesn't require return distribution assumptions.
Formula
Profit Factor = Gross Profits / Gross LossesThresholds
- >2.0
- Excellent
- 1.5-2.0
- Good
- 1.0-1.5
- Marginal
- <1.0
- Losing money
Related concepts
- Win Rate — If you made 100 trades and 60 of them made money, your win rate is 60%. But here's the trick — a 40% win rate can still make you rich if your winners are much bigger than your losers. Win rate alone doesn't tell the full story.
- Sharpe Ratio — Sharpe ratio measures how much return you get for every unit of risk you take. A Sharpe of 1.0 means for every 1% of risk, you earn 1% return above the risk-free rate. Higher is better.
- Total Return — If you bought a stock for £100, it went up to £110, and you also received £5 in dividends, your total return is £15 or 15%. It counts EVERYTHING — not just the price going up, but any cash the investment paid you along the way.