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Analysis & metrics

Profit factor

By Jarosław Wasiński • Published: • Updated:
Gross profit divided by the absolute value of gross loss over a defined sample. State whether transaction costs are included. A value above 1 indicates a positive total only for that measurement convention; it does not prove a durable edge. With no losing observations the denominator is zero and the ratio is undefined.
Example. Five price P&L results are +120, +80, +100, −100 and −50 USD. Positive results total USD 300 and losses USD 150, giving PF = 2. A separate USD 10 fee per trade changes the results to +110, +70, +90, −110 and −60: PF = 270/170 ≈ 1.59, with total net P&L of USD 100.

Define numerator and denominator

Add the positive results in the chosen complete sample and divide by the absolute sum of negative results. Classify trades after applying the declared costs: a charge can turn a small gain into a loss. A report may use gross profit as the label for the sum of winning trades even when each includes costs; check the platform’s method. Zero results add to neither sum.

Read it alongside other measures

PF = 2 means two units of positive results for each unit of losses in that sample. It does not mean that every trade has risk:reward of 1:2. After fees, the example’s mean is 100/5 = USD 20 and its win rate is 3/5 = 60%. PF does not itself describe result order, holding time, exposure or drawdown.

Common mistake

A high ratio can depend on one large winner or a very small loss denominator. With no losses, the denominator is zero: do not present that as evidence of infinitely good performance. Exclude a selected large trade only in a clearly identified sensitivity analysis, keeping the complete-sample report. PF in USD and PF in R can differ when initial cash risk varies between trades.

Do not average subgroup ratios

One group has USD 100 gains and USD 50 losses, giving PF = 2. Another has USD 100 of each, giving PF = 1. Combined PF is 200/150 ≈ 1.33, rather than an average of 1.5. Combine the underlying sums first. Also disclose subgroups to reveal concentration in a particular period or setup. Apply group boundaries consistently without counting a trade repeatedly.

Practical review

Reconcile all fills and charges with statements. Report trade count, period, net P&L, profit concentration and drawdown. Evaluate the same rules on data withheld from fitting; no threshold, such as 1.5 or 2, independently establishes a durable edge. In the course: performance metrics and strategy audit.

Diagram and worked example

Educational infographic: Profit factor
Educational diagram; model data and assumptions are stated in the graphic.
Open the full-size graphic

FAQ

Does PF above 1 mean a profit?
It means a positive total under the declared convention when the denominator is positive. Omitted costs are not covered.
Can PF be compared between brokers?
Only after aligning data, costs, units, period and the definition of a trade.

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Jarosław Wasiński

Editor-in-chief, ForexMechanics.com • Macro & FX analyst

Independent analyst and practitioner with over 20 years of experience in financial markets. Actively involved in Forex since 2007, with a focus on fundamental analysis, OTC market structure, and disciplined capital risk management.

  • Creator and editor-in-chief of MyBank.pl, providing reliable financial education since 2004.
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