What profit factor measures
Profit factor is the money a strategy made on its winning trades divided by the money it lost on its losing ones:
profit factor = gross profit ÷ gross loss
A profit factor of 1.0 means the strategy broke even. Above 1.0 it made money: 1.5 means it made $1.50 for every $1.00 it lost. Below 1.0 it lost money. Because it is a ratio, it compares strategies of different sizes and account currencies directly.
It can also be built from averages, which is what this calculator does: gross profit is the number of winners times the average win, gross loss the number of losers times the average loss. That form shows the two levers behind the number, win rate and payoff ratio.
A worked example, with costs
The figures loaded above describe 200 trades with a 45% win rate, an average win of $300 and an average loss of $150. Before costs, the profit factor is 90 × $300 ÷ (110 × $150) = 1.64.
Now add $10 a trade in commission and slippage. Every winner shrinks to $290 and every loser grows to $160. Gross profit falls to $26,100, gross loss rises to $17,600, and the profit factor drops to 1.48. Net profit is $8,500, or +$42.50 a trade.
A $10 cost on a $150 risk looks trivial, yet it removed about a tenth of the profit factor. The tighter the stop relative to costs, the bigger the effect, which is why scalping strategies that look excellent before costs often fall below 1.0 after them. Always judge profit factor after costs.
What is a good profit factor?
- Below 1.0: the strategy loses money.
- 1.0 to about 1.2: marginal. A small rise in costs or a slightly worse market can erase it.
- About 1.3 to 2.0: where most durable strategies sit after costs.
- Above about 3: treat with suspicion unless the sample is large. Very high figures usually come from too few trades, a curve-fitted backtest or a period that suited the strategy unusually well.
Those bands are rules of thumb, not thresholds. A trend-following system with a 35% win rate and large winners and a mean-reversion system with a 70% win rate can share the same profit factor and behave nothing alike.
Profit factor versus expectancy
Profit factor says how efficiently a strategy turns losses into gains. It does not say how much it makes per trade or how many trades it took. Two strategies with a profit factor of 1.5 can have very different expectancies, and a profit factor from 20 trades is far less reliable than the same figure from 500. Use it alongside expectancy and sample size; the expectancy calculator computes all three from a list of your trade results, and the risk-reward calculator shows the win rate each payoff ratio needs to break even.