Definition in one sentence: the profit factor is the ratio between a strategy's total sum of gains and total sum of losses. Above 1, the strategy globally wins more than it loses.
The formula, and what it measures
sum of gains ÷ sum of lossesUnlike the win rate, the profit factor integrates the size of gains and losses, not just their frequency. A profit factor of 1.5 means that for each euro lost, the strategy gained €1.50. Below 1, it destroys capital, regardless of the percentage of winning trades.
How to read it: good vs bad
| Profit factor | Common reading |
|---|---|
| < 1 | Losing strategy |
| 1 to 1.5 | Marginal — fragile to costs |
| 1.5 to 2 | Solid |
| > 2 | Very good — check the sample and the costs |
A profit factor close to 1 is dangerous: it only takes the real costs (fees, slippage, spread) to be underestimated in the backtest for it to drop below 1 in live conditions.
The classic mistake
Trusting a profit factor computed on too few trades, or on a backtest that ignores fees. A nice profit factor obtained on 30 trades without realistic costs is worth almost nothing: it can collapse the moment it goes live. Always look at the sample size and check that costs are included.
At Sextant
Sextant is a transparent quant platform: backtests are versioned with real costs modelled per pair (fees and slippage included), precisely to avoid the flattering but hollow profit factor. The dashboard and the methodology show how these figures are obtained.
Frequently asked questions
What is a good profit factor?
Above 1, the strategy wins more than it loses. Between 1.5 and 2, it is generally considered solid; above 2, very good, provided the sample is sufficient and real costs are included. A profit factor close to 1 is fragile.
What is the difference between profit factor and win rate?
The win rate counts only the frequency of winning trades; the profit factor also integrates their size by relating the sum of gains to the sum of losses. A strategy can have a low win rate and a high profit factor, and vice versa.
Why can a high profit factor be misleading?
If it is computed on too few trades or on a backtest that ignores fees and slippage, it can collapse in live conditions. You should always check the sample size and the presence of real costs.