Definition
A ratio that compares the total profits generated by winning trades to the total losses incurred by losing trades. It helps assess the overall effectiveness and profitability of a trading strategy.
Formula
Profit Factor = (Sum of Profits on Winning Trades) / (Sum of Losses on Losing Trades)
Example
Let’s say you have the following trade history:
- Trade 1: Profit of $400
- Trade 2: Loss of $150
- Trade 3: Profit of $200
- Trade 4: Loss of $100
Here’s how you’d calculate the Profit Factor:
- Total Profit: $400 + $200 = $600
- Total Loss: $150 + $100 = $250
- Profit Factor: $600 / $250 = 2.4
A Profit Factor of 2.4 means your strategy generates $2.4 in profit for every $1 lost.
Key Points
- Strategy Evaluation: A higher Profit Factor indicates a more profitable trading strategy.
- Benchmark: A Profit Factor above 1 indicates a profitable strategy. Many traders aim for a Profit Factor of at least 2.
