Your Profit Factor

Win rate? Sure, it matters. But both you and I may have come across traders who blow up their trading accounts despite a high win rate.

Why?

Because they’re losing more on their losses than making on their wins.

This makes “trading win rate“ not so useful as a metric to see who is really profitable in this business.

Trading Profit Factor

Profit factor is what you really need to watch in trading. It’s simple: how much money are you making versus losing?

If you’re making $2,000 but losing $1,900, your profit factor is barely above 1. That’s not going to keep you in the game long.

How to calculate your trading Profit Factor:

Profit Factor = Total gross profits ÷ Total gross losses

For example, if you made $10,000 profits in winning trades and lost $4,000 in your losing trades, your profit factor would be 2.5 ($10,000/$4,000).

A profit factor above 1.0 means you’re profitable overall.

A profit factor below 1.0 means your strategy is not profitable and you should continue to improve your trading.

A great profit factor is anything above 2.5. It means your trading system works!

You can calculate profit factor on a daily, weekly, monthly, annually or on an all-time basis. It tells you how good your strategy is over those time periods.

As traders, we want to be able to use the same strategy and maintain a stable profit factor over an extended period of time like a year or two.

Consistent traders enjoy trading because they can always go into the market and use the same strategy again and again to extract profits. That’s not to say they don’t lose money, not at all. With a profit factor above 2.5, they are able to make much more in profits when they win compared to losses when they lose.

So aim high and find a way to be consistent with your strategy. It is possible but you cannot skip the learning part.