Profit focused ltd always hits the target. Profit factor in trading
All traders strive to maximize their profits. But in order to objectively assess your results of trading on Forex or another trader, his strategy, you need to be guided by something. There are many criteria by which the assessment is made, but profit factor most popular.
What is Profit Factor
Profit Factor is one of the indicators for assessing the effectiveness of a trading system. In fact, it shows the ratio of the profit received from transactions for a certain time period to losses. Moreover, it is not difficult to calculate it - the total profit for the required reporting period is divided by the total losses for the same period - this is the profit factor.
An example for clarity: 154 deals were made in the trader's terminal in 6 months. The total profit was $ 20,904, and the amount of losing trades reached $ 10,925. The profit factor in this case will be calculated as follows: 20,904 / 10,925 = 1.91. That is, during these six months, 1.91 times more profit from trading on Forex was received than losses. It's simple.
But what is the Profit Factor for?
Often, traders have to deal with this concept when they need to test new Forex trading strategies or some kind of automated advisors. And this indicator will help you quickly weed out risky options, analyze their potential and choose the best. In many trading terminals, you can easily and quickly generate a detailed report on transactions, where, along with other useful data, the Profit Factor is indicated.
When planning to open a position, you should not expect to make a profit in the long term if, when calculating the profit for a transaction, it will be commensurate with the potential losses. Actually, it is better not to open these positions at all.
Profit Factor serves as a filter, thanks to which a trader can immediately weed out not very effective trading systems.
After all, if you trade on the stock exchange using them, then with a high probability, in the end, everything will end up with a deposit drain.
The minimum allowable value of the Profit Factor starts from 1.6.
If it turns out to be less, this indicates to the trader the risk of losing his deposit in case of trading using this strategy. The profitability indicator is more than 2 - already speaks of confident trading on the exchange. The higher, the more profitable the trading system.
Features of the Profit Factor
It should be borne in mind that the indicator is not ideal, since it will not show the real trading potential with a small number of transactions, of which there were several random ones and with a large profit. In such cases, it is always high, but this does not in any way indicate the reliability of the strategy. The longer the period of time and the number of transactions, the more objective it is. Nevertheless, this is an excellent guide for beginners who have not yet figured out all the intricacies of trading on the exchange, and for experienced traders, if you need to quickly evaluate a particular strategy as a whole.
Reliable profit factor
In order to get a more accurate indicator of the profitability of the strategy, then it is calculated using a slightly different formula. At " reliable profit factor»The calculation principle is a little more complicated, but it shows better efficiency of the trading system.
You need to take the total income of all completed transactions and subtract 1 transaction with the highest profit for the entire reporting period. This value is now divided by the total loss on trades.
This approach helps to smooth out the indicator by discarding a trade that was most likely accidental. If the indicator is more than 1, then the strategy is profitable and can be considered in more detail.
If a trader intends to conduct a qualitative analysis of completed transactions and, in general, the potential of a Forex trading strategy or its investment attractiveness, it is important to always take into account the profit factor indicator.
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Often, when testing new Forex trading strategies and automated advisors, one has to deal with such a concept as profit factor, this indicator is the best way to characterize the efficiency of a trader's work.
Profit factor- a relative indicator that shows the ratio of the profit received for a certain time period to losses. It is quite simple to calculate it, for this we divide the profit for the reporting period by losses for the same time - profit / loss.
For example, in March, 60 transactions were executed in the trader's client terminal, the amount of profit for which was $ 7,500, and the amount of losses was $ 3,200. The profit factor will be equal
That is, in March we received 2.34 times more profit than losses, this indicator is important in a comparative analysis of trading efficiency. It makes it easier to find the most effective trading strategy.
At the same time, the following values of this indicator can be noted:
If the result is more than one, you have received a positive financial result based on the results of the reporting period.
A result of less than one indicates that the total amount for unprofitable transactions exceeded the profit for profitable transactions.
Based on the peculiarities of the calculations, the profit factor cannot have a negative value, but only zero, when it can be said that the trader has not received a single profitable deal during the work.
The trader's terminal will allow you to automatically get all the necessary statistics, including the profit factor, for this, you just need to display a detailed report on the terminal screen.
The ultimate goal of any trader or investor's work is to make a profit (or, as we often say, a profit). And the profit factor is nothing more than an indicator characterizing the quality of this very work to extract profit from your trading capital.
This indicator can be attributed to both the performance of an individual trader and the performance of a trading strategy. Perhaps the most famous is the second option - profitfactor in relation to a specific trading strategy.
If you had to work with strategy testers, then you probably came across this parameter, since it is one of the defining criteria for the final evaluation of a trading strategy. For example, in the strategy tester of the MT4 trading terminal (in its Russian version), this parameter is called profitability and its value is equal to the ratio of total profit to total loss (its absolute value).
Similarly, the concept can be applied both to the work of an individual trader and to the work of an entire investment fund. Its essence remains the same and its meaning is the same ratio of total profit to total losses.
In general, the value of the profit factor is calculated using the following formula:
Profit Factor = ΣP / ΣL, where
ΣP - the amount of profit for all transactions;
ΣL - the amount of loss for all trades.
If we apply this indicator to a trader's work, then it will show its quality, as they say, after the fact. That is, figuratively speaking, a trader will receive an assessment of his work when it is already clear that it was not carried out at the highest level.
From this point of view, it is most promising to apply this indicator to the assessment of trading systems (at the stage of testing and choosing the most appropriate one). In this case, the trader can run the system in advance at sufficiently long historical data excerpts and determine its profit factor with a sufficient degree of accuracy. That in the future will give him an idea of what can be expected from a particular tested trading system in the future.
Calculation example
Let's take a look at a simple example. Let's say a trader has made ten transactions (the number of transactions is so small solely for the simplicity of the given example, in reality, in order to obtain a reliable result, it is necessary to take into account at least 100 transactions), the results of which are given below:
- First deal: +1000 rubles
- Second deal: -500 rubles
- Third deal: +850 rubles
- Fourth deal: +920 rubles
- Fifth deal: - 1000 rubles
- Sixth deal: -950 rubles
- Seventh deal: +1100 rubles
- Eighth deal: -300 rubles
- Ninth deal: -400 rubles
- Tenth deal: +550 rubles
We sum up all the profits: 1000 + 850 + 920 + 1100 + 550 = 4420 rubles
We sum up all the losses: 500 + 1000 + 950 + 300 + 400 = 3150 rubles
Now let's calculate the required coefficient:
Profit factor = 4420/3150 = 1.4
As can be seen from the calculation performed, the found value of the indicator is below the permissible value (1.4<1.5), а потому рассматриваемая торговая система нуждается в доработке. Ещё раз повторюсь, что десять сделок (как в нашем примере) для реальной оценки торговой системы это очень-очень мало.
Calculation of the reliable value of the profit factor
Sometimes it happens that the final result of a trader's work is due more to luck than his professional skills. For example, if the lion's share of the profit was obtained in one transaction due to an extremely favorable coincidence of circumstances. In this case, the total profit also exceeds the total loss, and the value of the profit factor, accordingly, also shows a good value (more than 1.5).
In order to exclude pure luck from the calculations of the profit factor, evaluating with its help exclusively the professionalism of a trader, the concept of a reliable profit factor was introduced ( English reliable profit factor).
The reliable value of the profit factor is calculated by analogy with its usual value, only the profit for the most profitable of them is deducted from the total profit for all transactions:
Reliable Profit Factor = (Σ P - Pmax) /Σ L, where
Pmax - the trader's profit for the best deal in the period under review.
Thus, an attempt is made to neutralize the influence of accidents. After all, as they say, stability is a sign of skill. That is, if the trader's profit is obtained through skill, then his profitable trades will differ little from each other in their result (the result will be relatively stable). And if chance comes into play, then one or more trader's transactions can greatly outperform all others.
The value of the reliable profit factor, of course, will be lower than the value calculated using the first of the above formulas. And if its usual value should not fall below 1.5, then the reliable value is considered acceptable if it is above one. Otherwise, the results of the work will be considered unsatisfactory and it will be necessary to radically revise the tactics or strategy of your trading (or the algorithm of the trading system).
How to increase the value of the profit factor
In order to increase the value of the considered coefficient, there are two obvious ways:
- Increase the likelihood of making profitable deals;
- Increase the profit (or, accordingly, reduce the loss) for each individual trade.
In the first case, to increase the profit factor, you need to improve your trading system in terms of technical and fundamental market analysis. You can introduce auxiliary indicators or take into account new fundamental factors, thus increasing the statistical likelihood that each of the trades made will be potentially profitable.
In this case, even with equal values Take Profit and Stop loss, you can be in profit (and have a profit factor> 1.5) only due to a larger number of profitable trades.
In the second case, we are talking about a shift in the profit / loss balance towards the trader by changing the ratio Take Profit / Stop Loss... In this case, you can be in profit even if there are more losing trades than profitable ones.
Suppose that in each individual trade the value TakeProfit equal to the value StopLoss, or in other words, profits are equal to losses. Now, if we consider a hypothetical series of such trades made in a random order, then with their number tending to plus infinity, the ratio of profitable to unprofitable will tend to 50/50. Accordingly, the value of the coefficient , in this case, will tend to unity.
In this case, it is logical to assume that the change in the ratio Take Profit / Stop Loss should lead to an increase in the ratio ... If we assume that at the same time, the ratio of winning trades to losing trades will remain unchanged, then will grow in the same proportion as Take Profit / Stop Loss... That is, to increase the profit factor, the values included in the system should be increased Take Profit and (or) decrease Stop loss.
However, in this case, one should take into account the fact that too large an increase in the ratio Take Profit / Stop Loss will invariably lead to the fact that the number of losing trades will increase (and this, in turn, will lead back to a decrease in the value ). See the picture above.
Conclusion
Thus, we have considered with you one of the most important criteria for the effectiveness of a trader's trading system. This indicator allows you to estimate offhand the results of testing a particular trading system and immediately discard all those for which its value turned out to be below the permissible value (1.5).
To obtain the most reliable value of the profit factor, it is necessary to consider sufficiently large series of trade transactions (both in terms of the number of transactions and the length of the series). The more deals underlie the calculated coefficient, and the longer the time interval they reflect, the more reliable it (the coefficient) is.
Judge for yourself, it's one thing when a trader made five deals, got three profits and two "moose", then calculated his indicator and got the value 1.5. And it is quite another matter when the same value of the coefficient will be obtained on the basis of 1000 trades. Indeed, in the first case, the next five transactions can radically change the final value of the calculated indicator, and in the second, the next thousand transactions will hardly differ greatly in quality from the previous one.
He can analyze the potential for opening or closing positions relative to each other and choose the best option - with minimal risks and maximum profitability. In fact, there are many criteria by which the assessment is carried out. At the same time, the most popular is the so-called profit factor.
The essence of the profit factor
The calculation is very simple - you need to sum up all the profitable and unprofitable trades. In the future, using the obtained indicator, you can evaluate how profitable the selected system is. It is believed that the optimal value of the profit factor is not less than 1.6. At the same time, everything that is above indicates the effectiveness of the strategy, and everything below indicates increased risks.
In simpler terms, the profit factor is the ratio between the sizes of take profit and stop loss orders. If either the trader is planning to receive, which is commensurate with the probable losses, then it is better not to make such a deal at all. This filter is very good in that it can be used to immediately weed out the most risky options.
Reliable profit factor
A more accurate indicator is the so-called "reliable profit factor". Its main advantage is maximum compliance with existing realities.
Calculating the parameter is as easy as shelling pears - from the total income of all transactions - S
(Pi) one most profitable is subtracted - Pmax. The final result remains to be divided by the gross loss - S (Li) (here it is necessary to sum up all the losses).
The best option is when the reliable profit factor is greater than one. It is also important to note that when performing calculations, one of the most profitable trades must be discarded. Why is this done? The reason for the large income could be either a lucky coincidence, or the high-quality work of the strategy. But in most cases, luck plays a role.
Thus, when calculating a reliable profit factor, you can exclude happy accidents. If during the analysis the profit indicator is more than one, then the system can be considered the most effective.
But the above indicators are not all that can be taken into account when calculating. In particular, most traders try to calculate the percentage of trades, both unprofitable and profitable. It is generally accepted that the higher the percentage of winning trades, the better. But it is not so. It often happens that first there are unprofitable trades with insignificant losses, and then - trades with large wins. Such a system is also considered profitable.
Do you need to keep a trader's diary?
Unfortunately, without recording the real indicators of transactions, the trader will not be able to accurately calculate the indicators of the system's efficiency. If you have a diary, it is much easier to make adjustments, enter new parameters and re-calculate. This approach allows you to calculate important data with maximum accuracy in the future.
Should you always stick to a profit factor with a size of 1.6?
This parameter is considered the minimum acceptable. Its decrease speaks only of a decrease in the profitability of transactions and an overall increase in the trader's risks.
On the assessment of the indicators of trading systems, in which we analyzed the first part of the parameters. This article is essentially the second in a series and today we will talk about such indicators as: "Profit factor", "Recovery factor" and "Win rate". Let's start in order.
PF ( profit factor) Is an indicator that reflects the profitability of your trading system, and also to some extent (indirectly) allows you to judge its stability through the interpretation of the superiority of profit over loss. Mathematically, the calculation is the ratio of the sum of all winning trades to all losing trades. The higher the number, the better.
Recovery factor
This indicator is the ratio of the absolute profit to the maximum drawdown. It can be used to judge the rate of exit of the system from the drawdown, the higher it is, the faster the system is able to exit the loss.
I consider this parameter to be one of the key ones by which one can judge the reliability of the entire system and I definitely take it into account. It is believed that systems with an indicator below 4 represent an increased danger.
Win rate
It is a value that shows the ratio of the average winning trade to the average losing trade - it reflects how many times the average profit is greater than the average loss. This is especially important for systems that have a very low percentage of positive trades. Basically, it is “psychological” in nature, since not every trader can withstand a large series of losing trades.
Finally
These are all the indicators that I wanted to tell you about today, so I will summarize a little.
Surely you have already understood that it is stupid to evaluate a trading system only according to one of the presented criteria. Each of them should be taken into account.
Usually, the question of choosing the "main" one arises especially when choosing from the versions of the system that you received as a result of optimization. Which one is better to choose: more profitable or maybe less risky (with a lower maximum drawdown)? Unfortunately, there is not and cannot be the only correct answer. As a result, everyone develops his own rules on the basis of which he will make a decision.
On my own I want to add that usually, the system as close as possible to the median has a very high "Recovery Factor", which means that we can expect more stable work from it.
For today this is all that I have prepared for you. Do not forget to subscribe to blog updates - there are many more interesting articles ahead. See you!
P.S. If you want to learn more about how to create such systems in TSLab, as well as go all the way to launching your first robot on the Moscow Exchange, I recommend taking the training here.
