What is Profit factor?
Profit factor is gross profit divided by gross loss over a set of trades; a value above 1.0 means the wins outweighed the losses.
What does Profit factor mean in practice?
Add up every winning trade, add up every losing trade as a positive number, and divide. A profit factor of 1.5 means the strategy made 1.50 for every 1.00 it lost. Exactly 1.0 means breakeven before costs, and below 1.0 means a losing strategy.
It folds win rate and the size of wins and losses into one figure, which is why it is more useful than win rate. It is sensitive to a few large trades, though, so a high profit factor built on one outlier win deserves suspicion.
A worked example
Illustrative only: total winning trades sum to 6,000 and total losing trades to 4,000. Profit factor is 6,000 divided by 4,000, which is 1.5.
How to read or test it
Compute it with and without the single largest winning trade. If removing one trade drops it close to 1.0, the figure rested on that trade rather than on the strategy. Check it across different periods too, and look at it together with the number of trades. A profit factor that is only slightly above 1.0 is easily wiped out by costs you underestimated, so test it with deliberately higher fees and slippage. Quote the trade count whenever you quote the figure, so nobody mistakes a thin sample for a robust one.
How AKQX handles Profit factor
AKQX backtests report profit factor, and a result is auto-rejected if it is below 1.0.
See Backtesting methodology for the feature page.
A common mistake
Trusting a high profit factor from a small sample. A few trades can push it far from its long-run value.
Educational only. This entry explains a term. It is not investment advice and does not recommend any trade, setting or strategy, and example numbers are illustrative, not results.
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