Profit factor in gold trading

Profit factor is the total of all winning trades divided by the total of all losing trades, both as positive numbers. A profit factor of 1.0 means break-even, below 1.0 a loss, and above 1.0 a profit. It appears in every MT5 strategy tester report and most journal tools.

How it applies to gold trading

Profit factor combines win rate and the size of wins against losses in one number, so it is a quick way to compare gold strategies with very different styles. A scalping system with a 70% win rate and small wins can have the same profit factor as a trend system with a 35% win rate and large wins.

It has limits. Profit factor ignores the order of trades, so it says nothing about drawdown, and a small sample of trades can show a high figure by luck. It should be calculated after spread, commission and swap; on gold, costs alone can move a marginal 1.2 below 1.0. Read it next to the number of trades, the maximum drawdown and the expectancy per trade.

Worked example

Example (hypothetical numbers): over 50 gold trades, 22 winners made $6,600 and 28 losers lost $4,200. Profit factor = 6,600 ÷ 4,200 = 1.57. Adding $15 of costs per trade (50 × $15 = $750) to the losses gives 6,600 ÷ 4,950 = 1.33, still profitable but less impressive.

A common mistake

Celebrating a profit factor of 3 or 4 from 20 backtest trades. Small samples exaggerate it; check stability over hundreds of trades and different years.

See also: Expectancy, Win rate, Payoff ratio, Sample size.

Frequently asked questions