What is profit factor in trading?

Profit factor is your gross profit divided by your gross loss over a set of closed trades. It answers one question: for every dollar lost, how many dollars were won?

The profit factor formula

Profit factor = total dollars from winning trades ÷ total dollars lost on losing trades (the loss is taken as a positive number).

Worked example

Over 58 trades, 24 winners made $925 in total and 34 losers lost $1,798.75 in total.

Calculation

$925 ÷ $1,798.75 = 0.51. This trader lost about $1.95 for every $1 won.

How to read profit factor

Below 1.0

Losses were larger than gains: the sample lost money overall.

Exactly 1.0

Gains and losses cancelled out, before any costs not already included.

Above 1.0

Gains exceeded losses in that sample. Many systematic traders look for a profit factor meaningfully above 1 across many trades and different periods before trusting it, because a short lucky run can produce a high number.

Why sample size matters

A profit factor from 20 trades can swing widely with one or two large trades. Compare the number across separate periods, for example the first and second half of your history. A figure that holds up in both is more informative than one large number from a single stretch.

Check it by period

A simple test

Split your trades by date into two halves and calculate profit factor for each. If one half is well above 1 and the other below, the overall figure is mostly describing one period.

Profit factor, win rate and payoff

Profit factor combines how often you win with how big wins are compared with losses. A low win rate can still produce a high profit factor if winners are much larger than losers. See win rate vs. average win and loss.

Educational content only. Not investment, tax or legal advice. Past results do not predict future results.