Profit factor: formula, example, and how to read it honestly
Profit factor is one of the most useful numbers in a trading review, and one of the easiest to misread. Here is the formula and the context it needs.
Profit factor answers a simple question: for every dollar lost, how many dollars were made? It is gross profit divided by gross loss, calculated over a set of closed trades.
The formula
Gross profit is the sum of all winning trades. Gross loss is the absolute sum of all losing trades. Breakeven trades are usually excluded, because they neither add to profit nor loss.
A worked example
| Trade | Result |
|---|---|
| 1 | +$420 |
| 2 | -$180 |
| 3 | +$260 |
| 4 | -$120 |
| 5 | +$90 |
| 6 | -$300 |
Gross profit is $420 + $260 + $90 = $770. Gross loss is $180 + $120 + $300 = $600. Profit factor is 770 ÷ 600 = 1.28.
For every dollar lost, the strategy made $1.28. That is profitable, but the sample is six trades. It would be a mistake to treat 1.28 as a stable property of the strategy after one week.
What counts as good?
There is no universal threshold. A profit factor of 1.2 can be excellent for a high-frequency strategy with tight risk, and fragile for a strategy that depends on one large winner. Common reference points:
- Below 1: the strategy lost money over the period.
- 1.0 to 1.2: marginal, and sensitive to a few trades.
- 1.2 to 1.5: profitable, worth reviewing for consistency.
- Above 1.5: strong on the sample, but check the sample size and the largest winner.
A profit factor above 2 on a small sample is often one outlier trade, not an edge. Always read it with the trade count and the largest win.
What profit factor does not tell you
- How much risk was taken to produce the result.
- How deep the drawdown was along the way.
- Whether the result is statistically meaningful.
- Whether the process was good or the outcome was lucky.
That is why profit factor belongs next to win rate, average win and loss, maximum drawdown, and the trade count. A strategy with a 1.4 profit factor and a 40% drawdown is a different proposition from the same ratio with a 10% drawdown.
Profit factor and win rate
Win rate and profit factor are related but not interchangeable. A high win rate with small winners and large losers can produce a profit factor below 1. A lower win rate with large winners and small losers can produce a healthy profit factor. Neither number is complete on its own.
You can calculate your own ratio with the profit factor calculator. If you want the metric calculated from your MT5 history automatically, Action Journal shows it beside win rate, average win and loss, and maximum drawdown.