Profit Factor is the ratio of the total dollar profits from winning trades to the total dollar losses from losing trades, both taken as gross figures over the same period. A Profit Factor of 1.0 means the system breaks even before costs; above 1.0 it is profitable; below 1.0 it loses money. Most professional traders consider 1.5 the minimum threshold for a strategy worth trading live, because anything lower tends to dip below 1.0 during normal drawdown periods and is psychologically very hard to hold through.
Formula
Profit Factor = (Sum of Winning Trade Profits) / (Absolute Sum of Losing Trade Losses)
Where the numerator is the gross dollar profit from all winning trades summed together, and the denominator is the absolute value of the gross dollar loss from all losing trades summed together. Costs (commissions, swap, spread) should be included in each individual trade's P&L before summing.
Worked example
Over 200 trades you booked $24,000 in gross winning profit and $15,000 in gross losing losses.
Profit Factor = $24,000 / $15,000 = 1.60
For every $1 lost on losers, $1.60 was made on winners. A new sample of 200 trades with the same edge would on average produce a similar ratio, though month-to-month it could swing between 1.2 and 2.0.
Why it matters
Profit Factor compresses the entire payoff structure of a strategy into one number. Unlike win rate, it cannot be gamed by setting wide stops; unlike average R, it weights large winners and large losers proportionally. A strategy with PF of 2.0 is roughly twice as resilient to drawdown as one with PF of 1.5.
Common pitfalls
A single outlier winner can lift Profit Factor above 1.5 even on a losing system. Always check the largest-winner-removed Profit Factor — if the strategy collapses to under 1.0 without one trade, the edge is illusory. Also, PF is sensitive to sample size: 30 trades is not enough to trust the figure.