Profit factor is the ratio of gross profits to gross losses over a given period or set of trades. It is calculated by dividing the total money gained on winning trades by the total money lost on losing trades. A profit factor greater than 1.0 means a strategy is profitable overall.
Profit factor is calculated as: Gross Profits / Gross Losses. If a strategy generated $15,000 in winning trades and $10,000 in losing trades, the profit factor is 1.5. This means for every dollar lost, the strategy earned $1.50. A profit factor of exactly 1.0 means break-even (excluding commissions). Most professional traders aim for a profit factor between 1.5 and 2.5. Values above 3.0 are rare in live trading and may indicate curve-fitting or insufficient sample size.
Over 100 trades, a trader has 55 winners totaling $22,000 in profits and 45 losers totaling $13,200 in losses. The profit factor is $22,000 / $13,200 = 1.67. This tells the trader that for every $1 lost, they made $1.67. If commissions total $1,500, the net profit factor is ($22,000 - $1,500) / ($13,200 + $1,500) = 1.39.
Profit factor provides a single number that summarizes the overall efficiency of a trading strategy. Unlike win rate alone, profit factor accounts for the size of wins and losses, making it a more complete measure of performance. It is one of the first metrics professional traders and prop firms examine when evaluating a strategy.