Profit factor is total gross profit from winning trades divided by total gross loss from losing trades.
Profit factor = gross profit ÷ gross loss
A strategy that made $150,000 on winners and lost $100,000 on losers has a profit factor of 1.5. Below 1.0 means the strategy loses money.
What’s good
Above 1.5 is solid. Above 2.0 is strong. Above 3.0 over a long period is exceptional and usually means the sample is short or the strategy is untested in a bad regime.
Costs matter: a backtest profit factor of 1.3 can easily turn into 0.95 live once fees and slippage are paid.
Why it’s useful
It’s intuitive. Every dollar lost was matched by $1.50 earned. It doesn’t depend on the number of trades or the period, so it compares strategies with different frequencies.
Why it isn’t enough
Profit factor says nothing about how the profits and losses were distributed. A strategy with a profit factor of 1.8 might earn it from hundreds of small wins and a few catastrophic losses — a distribution that will eventually deliver the catastrophe at the wrong moment.
Read it alongside win rate, average win and loss, and maximum drawdown. Together they describe the shape of a strategy’s returns. Alone, each describes one dimension of it.