Profit Factor and ExpectancyMeasuring Your Edge

Two numbers that answer the only question that matters: is this method making money, and how much per trade? This free lesson covers: Why measure at all, Profit factor, Work it out, Reading it, Expectancy, Work it out, Costs are not optional, Where the numbers come from, Why both numbers, Put it together.

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Measuring Your Edge · Learn · Step 1 of 10

Why measure at all

Most traders judge a method by how the last few trades felt. That is the least reliable input available — recent outcomes dominate memory regardless of how representative they are.

Two numbers replace the feeling: profit factor tells you whether the method makes money overall, and expectancy tells you how much it makes per trade.

Going deeper

More on profit factor and expectancy

Profit factor and expectancy are the two figures on every professional trading report, and both long predate retail trading — they come from portfolio performance measurement rather than from any particular trading style.

Neither is predictive. They describe a sample of past trades, and their usefulness depends entirely on that sample being large enough and honestly recorded, which is what the last lesson in this module is about.

Common mistakes4
  • Calculating from chart prices rather than the account statement, which silently omits spread and commission.
  • Including open positions in the figures. Unrealised profit is not profit.
  • Comparing profit factors between traders with different holding periods. A scalper and a swing trader at the same profit factor are not doing comparable things.
  • Treating a profit factor of 3+ over twenty trades as evidence of anything.
From experience2
  • Track expectancy in R rather than currency. It stays comparable as the account changes size, and removes the emotional weight of money from the review.
  • Recalculate on a fixed schedule rather than after notable trades — otherwise the number gets checked mostly after wins.
Questions people ask3

What is a good profit factor?

Above 1.0 is profitable before costs. Values sustained above roughly 1.5 over a large sample are strong. Very high figures usually indicate a small sample rather than an exceptional method.

What is the difference between profit factor and expectancy?

Profit factor is a ratio over the whole sample — did it make money. Expectancy is an average per trade — how much each trade is worth. You want both.

Should losing trades be excluded if I broke my rules?

No — they are part of your real results. Record them and tag them separately, so you can measure the method and your execution independently.