Letter VI
Profit Factor Explained: The One Number That Does Not Lie
If this site were allowed to show only a single number, it would be the one this letter is devoted to. Not because it is magical — but because it is the hardest trading metric to put make-up on. Whoever wants to read the Lexicon of the Abyss from the beginning, begins here.
The definition
The profit factor is a fraction: the sum of all profits divided by the sum of all losses over a period.
If the numerator equals the denominator, the result is 1.0 — the system has earned nothing net. Above that, profits dominate; below it, the system eats substance. A profit factor of 1.2 means, in words: for every unit lost, 1.2 units were won. A value of 0.9: for every unit won, 1.11 were lost — a leak no optimism will plug.
Two subtleties belong to a clean calculation. First: fees. They belong on the loss side, for they are genuinely incurred; a calculation without fees is cosmetics. Second: the period. A profit factor always applies to something — to these hundred trades, to this month, to this trial. Without that statement, the number is a torso.
Why this number lies badly
The most popular shop-window metric is the return: “+340 % in one year.” The return has only one flaw — it can be manufactured at will. Take enough leverage, a favourable time window and the willingness not to mention the accounts that blew up, and any desired percentage appears. The return answers the question: what came out? It conceals the question: what was risked for it — and how often did it go wrong?
The profit factor answers exactly that second question, because it carries the losses in its own formula. You cannot state it without stating the loss side; its denominator is the loss side. A history whose red days were deleted no longer has a denominator — the profit factor exposes the gap instead of covering it. That is why loss days are sacred: without them, this number is not even defined.
And the profit factor can do one more thing that makes it indispensable for this site: it works without money amounts. Whether a system trades small units or large — the ratio of profit to loss stays the same. That is why it fits the FLEX principle of this documentation, which on principle shows no amounts: the number proves quality without arousing desire.
Which values are realistic
Here is an orientation that is deliberately sobering — the Lexicon of the Abyss owes you sobriety, not dreams:
- Below 1.0 the system loses. Full stop. Even with a high win rate, even with pretty weeks in between.
- 1.0 to 1.2 is the zone of noise. Skill may live here, or luck; only many trades separate the two.
- 1.2 to 1.8 is, over long periods, the territory of solid systems. Unspectacular on paper, viable in reality.
- Sustained above 2.0 is rare and deserves suspicion rather than admiration — usually a short period, a tiny sample or a friendly selection is behind it.
The word sustained carries the whole weight of that list. A profit factor from twenty trades is an anecdote. From a hundred trades: a hint. From many hundreds, across different market phases: an argument. The sample ennobles the number, not the other way round — a principle that applies equally to the win rate.
What the number does not say
No tool of the lexicon is complete, and honesty demands the limits. The profit factor is blind to three things.
It does not see the sequence: whether the losses fell scattered or as one single abyss in a row — the number stays the same, the experience does not. For that there is the drawdown, the twin of this letter. It does not see the distribution: a system whose total profit hangs on a single outlier can show the same profit factor as one with a thousand even small steps — reliability is not the same as ratio. And it does not see the future: it is a protocol of what has been, not a promise of what is coming. No honest person will build you a forecast out of a profit factor.
In the trial this site documents, the profit factor is the central yardstick: a threshold was fixed before the start, and the machine — an autonomous trading system — must hold it or miss it over a defined number of days and trades. The value is published continuously, even when it is below the threshold. Especially then.
For that, in the end, is why this letter bears its title: not because the number cannot be wrong — every number can be. But because it cannot be half. Whoever states the profit factor has stated his losses with it. That makes it unpopular in the shop window — and irreplaceable in a chronicle.
— signed: The Chronicler
Questions on this letter
What is the profit factor?
The profit factor is the sum of all profits divided by the sum of all losses over a trading period. A value above 1.0 means profits outweigh losses. A value of 1.2 means 1.2 units won for every unit lost.
How is the profit factor calculated?
Gross profit ÷ gross loss. Example: total profits of 600 units and total losses of 500 units give a profit factor of 1.2. Fees should be counted into the losses, otherwise the number flatters.
What is a good profit factor?
Over long periods and many trades, values between 1.2 and 1.8 are considered solid; sustained values above 2.0 are rare. Very high values from short periods or few trades are usually luck or selection — sample size matters more than the number itself.
Why is the profit factor more honest than returns?
Returns depend on stake, leverage and time window and can be dressed up by choosing the window. The profit factor puts profits and losses of the same period into direct ratio — it works without money amounts and resists screenshot cosmetics.
Is the profit factor alone enough to judge a system?
No. It says nothing about the depth of interim losses (drawdown), the number of trades or the distribution of results. It becomes meaningful only together with drawdown, sample size and observation period.
Documentation, not financial advice. No signals. Nobody can invest here.