Profit Factor
Profit factor is the sum of all profits divided by the sum of all losses (in absolute terms). A profit factor above 1.0 means the strategy is profitable; below 1.0 means it loses money.
Interpretation
- < 1.0 — losing strategy
- 1.0 – 1.3 — weak edge, easily killed by costs
- 1.3 – 1.8 — solid retail strategy
- 1.8 – 2.5 — strong
- > 2.5 — exceptional, often a sign of overfit if backtest sample is small
Formula
Profit Factor = Σ(winning trades) / |Σ(losing trades)|
Caveat
Profit factor doesn't tell you about consistency. A strategy with one massive winner and 99 small losers can show profit factor 1.5 — and you'd need iron nerves to trade it. Pair it with win rate and Sharpe.
Related Terms
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