Forex for beginners

What is the Profit factor (profit factor) in trading on Forex

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Conducting trading on the financial markets, it is very important to adequately assess the end results of the trade. Knowing the final yield (in real money or percentage), the investor will not be able to see the dynamics of the trade because you will not be able to assess the real loss of funds for the entire period of trading. In the end, the trader will not be able to fully understand exactly how profits arise and whether it exceeds the losses.

Evaluation criteria quite a lot, but the most popular can be called the profit factor.

What is the Profit factor (profit factor)?

Profit factor (profit factor) is the result of the relationship of the total number of all transactions, which brought profit to the amount of loss-making trading operations over a certain time interval.

For example, to view this figure in three months of trading should be to generate a detailed report in the trading terminal MetaTrader 4. In the first column of this report, you can see the numeric value of the profit factor.

If this value is less than one, trading is believed to be unprofitable. If it is close to 1, the final result of the trader will be almost zero. In the case when the Profit factor is in the range from 1 to 2, we can talk about the lack of stability in the trade. The result is greater than the value 2, is an indicator of a confident and profitable trading.

Red color indicated in the image:

  • Gross Profit — total profit for all transactions with a positive outcome value;
  • Gross Loss — the total loss for all transactions with a negative total value.

In this case, the ratio of gross profit to the gross loss exceeds the value of 2.

For what Profit factor (profit factor)?

Newcomers often ask: “why do we use Profit factor? Can we just take a look at the profitability of trading”? In practice, however, for a detailed analysis it is not enough to focus only on the profitability of the trade.

For example, the investor started activities on the financial market with a starting Deposit of 10,000 USD. After two months the investor to summarize the trading and performance of your own trade made a detailed report. The final amount of the profit amounted to $ 3,000. This figure can be considered as a good indicator.

However, at a closer viewing Gross Profit and Gross Loss was that the first option is 20 000 USD, and the second is 18 000 USD. In this situation the amount of profitable trade transactions slightly exceeded the number of losing trades:

Profit factor = 20 000 USD / 000 USD 18 = 1.11.

Such trading cannot be described as promising. A detailed analysis of the dynamics held by the investor deals, in addition to the General trade are the most useful for making important decisions:

  • real analysis of your own trade helps the trader to see blunders to prevent them in the future;
  • to use a similar approach to assess the performance of colleagues within their workflow;
  • carefully examine the investment proposal;
  • to explore other investment services.

Sometimes the trader should test the trading strategy or automated robots. Profit factor will greatly help to identify and weed out the risky options and to choose the most effective system with maximum yield and minimum risk. The greater the period of time covered by the indicator, so it will be more objective.

Some specialists, for the greater reliability value calculation of the profit factor suggest subtracted from total revenue the result is the most profitable for the entire reporting period of the trading operation. Then, the resulting value should be divided by the total losses. This calculation method helps to eliminate accidental successful trading operation and to obtain more reliable Profit factor.

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