What is the Profit Factor or Profit Factor?

The profit factor or Profit Factor is a measure used to evaluate a system of trading in front of others and, thus, be able to see which one suits us.

The calculation of the Profit Factor is really simple, since we will only have to divide what certain operations earn with the losses that occur in others. The losses that we are going to place will have to be placed in absolute values ​​(remove the negative sign) to be able to carry out the operation.

The interpretation of the results can be summarized in the following points:

  • If the result gives us a number greater than 1, the strategy is profitable.
  • If, on the contrary, the Profit Factor is less than 1, the strategy will not be profitable.
  • The performance threshold is set at 1. That is, if a Profit Factor is greater than 1, it will be profitable invest in said model.
  • On the other hand, if the result is 2 or more, we can indicate that we are facing a good trading system

Finally, we are going to see an example that will be intuitive for us to know how to interpret the result. Let's imagine that we had a profit result of 1500 and a loss of 1200. The profit factor would be:

Profit Factor = Gross Profit / Gross Loss = 1500/1200 = 1

As we can see, we have obtained a profit factor of 1. This indicates that, being greater than 25, the trading system is profitable. We can also draw a conclusion that, for every euro that we have lost while operating, we will earn 1 euros.

As we have seen, this measure can give us information about whether or not it is advisable to invest in a certain trading system. However, experts advise that this is not the only measure we take into account to assess the performance of a certain strategy.

It is advisable to accompany this measure with other indicators and put the strategy, analyzing the tasks and operations that are carried out.

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