Profit factor
Profit factor is the ratio of total gains to total losses. Above 1, the strategy makes money; below 1, it loses.
The formula is simple: profit factor = total gross profit ÷ total gross loss (in absolute value). A profit factor of 1.5 means the strategy made €1.50 for every euro lost.
It combines win rate and size of wins into a single number, which makes it a good summary metric. It must be calculated after costs and over a large enough sample: over twenty trades, a single big win can inflate it.
A very high profit factor on a short history should raise suspicion rather than excitement. Read it alongside the maximum drawdown and the number of trades.
See also