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What is Profit Factor?

Profit Factor is gross profit divided by gross loss over the tested period; above 1 means profitable on that data, but it must be read with sample size, drawdown and costs.

IntermediateAURORA StandardAURORA Pro6 min read
Topic: Research & ValidationMarket: All marketsAuthor: KenvinHoangReviewer: KapyBara✓ Reviewed 14 Oct 2026
The question

A Profit Factor of 2.0 over 15 trades or 1.3 over 400 trades: which is more trustworthy?

After this lesson you will

  • Calculate Profit Factor from gross profit and gross loss
  • Understand how Profit Factor relates to win rate and average R
  • Know why Profit Factor on small samples misleads

What is Profit Factor?

Profit Factor = Gross profit of winning trades ÷ Gross loss of losing trades

  • Above 1: profitable on the tested data.
  • Equal to 1: breakeven.
  • Below 1: losing.

Profit Factor is closely related to expectancy: both combine win rate with the size of wins and losses. The difference is that Profit Factor is a ratio, while expectancy is a difference in R per trade.

Example

Hypothetical system: 40% of trades +1.5R, 15% 0R, 45% −1R.

Before costs After 0.1R cost per trade
Gross profit per trade 0.40 × 1.5 = 0.60R 0.40 × 1.4 = 0.56R
Gross loss per trade 0.45 × 1 = 0.45R 0.45 × 1.1 + 0.15 × 0.1 = 0.51R
Profit Factor 1.33 about 1.10
Expectancy +0.15R +0.05R

A cost of 0.1R per trade sounds small, yet it removes two thirds of the expectancy.

Common misunderstandings

  • A high Profit Factor means a good system. On small samples, a few big winners can push it very high.
  • The higher it is, the more you should trust it. A suspiciously good number (say above 3) on short data is often a sign of overfitting or luck.
  • Profit Factor describes risk. No. Two systems with the same Profit Factor can have very different drawdowns.
  • Reading it before costs. Always compare the figure after commission and slippage.

Chart example

Illustration of gross profit and gross loss per trade, Profit Factor 1.33 before costs Illustration with hypothetical values.

How do you read Profit Factor with AURORA?

  • The Strategy Validator (Standard and Pro) shows Profit Factor in the Strategy Tester, after the commission and slippage set in Strategy Properties.
  • The chart dashboard does not show Profit Factor; it shows total and average R, before costs.
  • Comparing configurations: when changing the Entry Filter Profile or a filter, compare Profit Factor, average R, maximum drawdown and trade count together. Never choose a configuration just for the highest Profit Factor.
  • In-sample versus out-of-sample: a sharp drop in Profit Factor out-of-sample is a warning sign.

Limits

  • Sensitive to big trades. A single very large winner can make up most of the gross profit.
  • Says nothing about time. Profit Factor does not tell you how long the system took to earn it.
  • Past results do not guarantee the future.

Practical checklist

  • Read Profit Factor after costs, not before.
  • Always state the trade count alongside Profit Factor.
  • Check whether a few of the largest trades make up most of the profit.
  • Read it together with maximum drawdown.
  • Compare Profit Factor between in-sample and out-of-sample periods.

Video Explainer

The video for this article is in production. The full written lesson is already complete.

Video chapters

  1. 2.0 over 15 trades or 1.3 over 400
  2. The Profit Factor formula
  3. How it relates to average R
  4. How much costs lower it
  5. Reading it in the Strategy Validator
Show transcript
A Profit Factor of 2.0 sounds better than 1.3. But if the 2.0 comes from 15 trades and the 1.3 from 400, the second is far more trustworthy. Profit Factor is gross profit divided by gross loss. Above 1 means the system was profitable on the tested data. For an example system that wins +1.5R on 40% of trades and loses −1R on 45%, Profit Factor is 1.33. But with costs of 0.1R per trade it drops to about 1.1. So always read Profit Factor after costs, with the trade count, and together with drawdown.

Product documentation

Educational and decision-support content, not investment advice. Chart examples are illustrative or historical and do not guarantee future results. Trading carries a risk of capital loss.