How to calculate profit factor
Profit factor = Gross profit ÷ |Gross loss|
Worked example
- $10,000 gross profit and $2,000 gross loss → profit factor 5.0.
- $8,000 and $4,000 → 2.0.
- $3,000 and $2,500 → 1.2: profitable, but thin — costs or a few bad trades could erase it.
How to interpret profit factor
Below 1.0 the strategy loses money. 1.0–1.5 is marginal, 1.5–2.0 solid, and above 2.0 strong. Very high values usually mean a small sample.
Profit factor combines win rate and payoff in one ratio, but unlike expectancy it doesn't say how much each trade earns. Use both.
Limitations and common mistakes
- Calculate it after costs. A gross profit factor of 1.3 can easily become 1.0 after commissions.
- A single outlier winner can inflate profit factor — check it with and without your best trade.