Glossary
Profit factor
Gross profit divided by gross loss over a set of trades. Above 1 the method made money in that sample; below 1 it lost money.
The profit factor is the sum of all winning trades divided by the absolute sum of all losing trades. A value of 1.0 means wins and losses cancel out. It combines the win rate and the size of wins and losses into one number, but it hides how many trades it rests on.
Example
Of 100 trades, 40 win +2 R each and 60 lose −1 R each. Gross profit is 80 R and gross loss 60 R, so the profit factor is 80 ÷ 60 ≈ 1.33. If costs take 0.25 R from every trade, gross profit falls to 40 × 1.75 = 70 R and gross loss rises to 60 × 1.25 = 75 R. The profit factor drops to 70 ÷ 75 ≈ 0.93.
Why it matters
A profit factor slightly above 1 before costs is common and usually disappears after costs. Always check whether it is calculated before or after costs, and on how many trades.