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Performance & Risk Metrics

Profit Factor Ratio

The ratio of cumulative profits from winning trades to cumulative losses from losing trades, expressed as a dimensionless metric indicating the efficiency of a trading signal or strategy.

Profit Factor divides the gross profit from winning trades by the gross loss from losing ones. A value of 1.0 is the breakeven line: above it the wins outweigh the losses, below it they do not. Because it ignores trade frequency and position sizing, it describes the raw shape of a system's payoffs rather than how much money it made.

The metric says nothing about the order or depth of losses, so a system with one catastrophic loss can post the same Profit Factor as one whose losses were small and spread out. Read it next to maximum drawdown and a risk measure such as CVaR. It is also sensitive to sample size: a high Profit Factor over a handful of trades is mostly luck.

Formula

Pi
Profit or loss on trade i
n
Total number of closed trades
Sources: Pardo, R. (2008). The Evaluation and Optimization of Trading Strategies. John Wiley & Sons. · Vince, R. (2009). The Leverage Space Trading Model. John Wiley & Sons.