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Risk Management

Profit Factor

Total gross profits divided by total gross losses. Above 1.0 is profitable, above 2.0 is excellent.

What is Profit Factor?

Profit factor is the ratio of gross profits to gross losses. It tells you how many dollars you make for every dollar you lose.

Profit Factor = Gross Profits / Gross Losses

Interpreting profit factor

  • Below 1.0: losing money overall
  • 1.0 - 1.5: marginally profitable, fragile
  • 1.5 - 2.0: solidly profitable
  • Above 2.0: excellent, but may indicate too few trades or overfitting

Related Terms

Average Down

Buying more shares of a stock you already own after the price drops, lowering your average cost per share. Can reduce your break-even price but also increases your exposure to a losing position.

Confirmation Bias

The tendency to seek out information that supports your existing trade idea while ignoring evidence that contradicts it.

Dollar Cost Averaging (DCA)

Investing a fixed dollar amount at regular intervals regardless of price. Reduces the impact of volatility by buying more shares when prices are low and fewer when prices are high.

Max Drawdown

The largest peak-to-trough decline in account value. Measures the worst-case loss experienced.

Round Trip

A complete trade cycle: opening a position and then closing it. Counted as one round trip regardless of share count.