The profit factor formula
Profit factor (PF) compares the money your winners made with the money your losers cost you:
profit factor = gross wins ÷ |gross losses|
Gross wins is the sum of every winning trade's profit. Gross losses is the sum of every losing trade's loss, which is a negative number, so you divide by its absolute value. The result is a ratio with no unit: it does not care whether you trade 1 share or 1,000.
Read it like this:
- Below 1.0: losses were bigger than wins. The period lost money before anything else is considered.
- Exactly 1.0: break-even.
- Above 1.0: wins outweighed losses. A PF of 2.0 means every dollar lost was matched by two dollars won.
You can run your own numbers in the profit factor calculator.
A worked example with ten trades
Suppose your last ten closed trades look like this (profit or loss after the trade closed):
| Trade | Result |
|---|---|
| 1 | $120 |
| 2 | $80 |
| 3 | $200 |
| 4 | $60 |
| 5 | $150 |
| 6 | $90 |
| 7 | −$100 |
| 8 | −$70 |
| 9 | −$50 |
| 10 | −$130 |
Gross wins = 120 + 80 + 200 + 60 + 150 + 90 = $700.
Gross losses = −100 + −70 + −50 + −130 = −$350.
Profit factor = 700 ÷ |−350| = 2.0.
Now add costs. If each round trip cost $8 in commissions and fees, the six winners shrink to $652 and the four losers grow to −$382. Profit factor becomes 652 ÷ 382 = 1.71. Same trades, a noticeably lower number. Always compute PF on net results, after costs, or you are measuring a strategy you do not actually trade.
What is a good profit factor?
There is no official threshold, and anyone who gives you one number without context is guessing. What you can say with certainty is arithmetic: below 1.0 loses money, above 1.0 makes money, over the trades you measured.
Beyond that, a few practical points help you judge your own figure:
- Margin for error. A PF of 1.05 is barely positive. A small rise in costs, slippage or one bad week can push it under 1.0. A higher PF leaves more room for things to go wrong.
- Sample size. A PF from 15 trades is a rough sketch. A PF from 200 trades across different market conditions is far more informative. The number does not tell you how many trades produced it, so always report the count next to it.
- Style. A trend-following approach with a low win rate and large winners and a mean-reversion approach with a high win rate and small winners can reach the same PF by very different routes.
- Suspiciously high. A PF above 4 or 5 on a small sample often means one outlier trade, a short lucky stretch, or a backtest that peeked at the future. Check before you celebrate.
Treat your PF as a description of the past, not a forecast. Markets change and a figure that held for six months may not hold for the next six.
How profit factor relates to win rate and payoff
Profit factor is fully determined by two other numbers: your win rate (WR) and your payoff ratio (avg win ÷ |avg loss|). Over N trades, gross wins = N × WR × avg win and gross losses = N × (1 − WR) × avg loss, so:
profit factor = (WR × payoff) ÷ (1 − WR)
This table shows the PF you get from each combination:
| Win rate | Payoff 1.0 | Payoff 1.5 | Payoff 2.0 | Payoff 3.0 |
|---|---|---|---|---|
| 30% | 0.43 | 0.64 | 0.86 | 1.29 |
| 40% | 0.67 | 1.00 | 1.33 | 2.00 |
| 50% | 1.00 | 1.50 | 2.00 | 3.00 |
| 60% | 1.50 | 2.25 | 3.00 | 4.50 |
Two lessons sit in this table. First, a 40% win rate with winners twice the size of losers (PF 1.33) beats a 50% win rate with equal-sized winners and losers (PF 1.00). Second, PF crosses 1.0 at exactly the point where your win rate equals the break-even win rate for your payoff. The two ideas are the same rule seen from different angles.
Where profit factor misleads you
Profit factor is useful, but it has blind spots you should know about.
- Outliers dominate. Take ten trades: one win of $900, three wins of $40 and six losses of $100. PF = 1020 ÷ 600 = 1.70. Remove the single $900 trade and PF falls to 120 ÷ 600 = 0.2. One trade carried the whole period. Look at PF with and without your largest winner.
- It ignores size of account and risk. A PF of 2.0 earned while risking 10% per trade is a very different experience from the same PF at 0.5% per trade.
- It ignores order. Ten losses in a row followed by ten wins gives the same PF as alternating results, yet the first sequence produces a much deeper drawdown.
- Break-even trades disappear. Scratches add nothing to either side, so PF says nothing about how often you are in the market for no gain.
Pair PF with expectancy (what you make per trade on average), your trade count, and your largest drawdown. Together they give a much more honest picture.
How to track profit factor in your journal
The most useful profit factor is not your overall one. It is the PF of each setup, each time of day, or each instrument. A combined PF of 1.3 can hide one setup at 2.1 and another at 0.7 that is quietly draining the account.
- Log every closed trade with its net profit or loss after costs.
- Tag each trade with the setup or reason you took it.
- For each tag, sum the winners and sum the losers, then divide.
- Write the trade count next to every PF so you do not over-read a small sample.
- Recompute monthly and compare against the previous period.
The trading journal spreadsheet includes the columns and formulas for this. If you would rather not maintain formulas, a journal app that imports fills from your broker can compute profit factor per setup for you.