However, if we were to provide a general rule of thumb that applies across all strategy types, it would be that a profit factor of three or slightly more is high, while still being realistic. For instance, having a profit factor of 3 or even more isn’t extremely high when we’re talking about mean reversion strategies, but certainly is a lot for other types of trading strategies. So, knowing that we like to see a profit factor of at least 1.25, you may wonder what we consider to be a high profit factor. However, we’d prefer to get up to somewhere around 1.4-2 to feel fully comfortable.Īgain, these limits are our personal opinions, and may vary depending on who you ask! What Is a High Profit Factor? High Profit Factor Once you get above 1.2, your margins are starting to get higher, and the strategy has a higher chance of working going forward. There really is no definitive answer to this, but if you were to ask us, we would say that we’re not prepared to trade strategies with a profit factor lower than somewhere around 1.2. You simply have a very small margin, which never is ideal in trading. Generally, those are not trading strategies you would like to trade in the first place since the slightest change in the behavior of the market will threaten to make the strategy unprofitable. Many times it can give a good indication about the robustness of strategy.įor example, once in a while you may stumble upon trading strategies that have a profit factor of as little as 1.1. The profit factor indeed is one of the best ways to evaluate the performance of a strategy and is an important part of our own strategy creation process. This means that a strategy that loses $100 would have to make $300 dollars, while a strategy that loses $50 dollars would have to produce $150 in gross profits.
For those who don’t know, gross losses and gross profits refer to the total amount that a strategy has lost and won respectively.įor instance, for a strategy to have a profit factor of 3, it must make three times more money than it lost during the period. What is Profit Factor? What Is Profit Factor?Īs we just explained, the profit factor is the ratio between gross profits and gross losses.
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