The edge metric
Profit Factor Explained — Gross Wins ÷ Gross Losses
Profit factor strips a strategy down to its essence: for every dollar you lose, how many do you make back? It's the cleanest sanity check on a backtest.
The formula
Profit factor = sum of all winning trades ÷ absolute value of sum of all losing trades. A profit factor of 2.0 means the strategy made $2 for every $1 it lost.
What is a 'good' profit factor?
Below 1.0: losing strategy. 1.0–1.5: marginal — costs (fees, slippage) will likely eat the edge. 1.5–2.0: solid. Above 2.0: excellent, but watch for sample-size issues — 5 lucky trades can inflate the number.
Why it complements Sharpe
Sharpe penalizes volatility evenly, including the upside. Profit factor only cares about win-vs-loss dollars, so it rewards positive skew (small frequent losses, occasional large wins) — the shape many trend-following strategies actually have.
Put this into practice
Sign up for Investapp and backtest any strategy in minutes — no credit card required.
Get started free