For what purposes is the profit factor used and its advantages
Performance evaluation is one of the most important tools for a trader to analyze this or that position. There are a huge number of criteria by which this process takes place, but many professionals use the profit factor.
In this case, everything is quite simple – it is necessary to add up the deals that bring profit and loss. This indicator will allow us to find out whether a trade will be the right one and whether it will give the expected profit. In most cases the optimum value of profit factor is not less than 1.6. A higher level indicates the effectiveness of the chosen strategy, and if the value is below this threshold – the deal has a high risk.
The Profit Factor is characterized by comparison of Take Profit and Stop Loss orders. If a market participant in the process of activity intends to make a profit, the amount of which will be almost the same as the probable loss, then the transaction will not be successful, and it is better to reconsider the decision on its closing. Such an instrument allows sifting out variants that have high risk at the initial stages.
A more accurate result contains a tool called Actual Profit Factor. Its main advantage is the maximum proximity to the actual trends, so its result will be almost fully consistent with the real market conditions.
To calculate this parameter, the sum of all transactions is used, of which the variant that brought the largest profit is subtracted. The resulting figure is divided by the value of the gross loss. All losses should be added up to obtain this indicator.
If the actual profit factor is higher than one, then it will be considered a good result. It is also important to know that when calculating one trade with a high profit is not taken into account. Such a step is dictated by the fact that to reject randomness. For example, a good deal could be caused by a pleasant accident, which is not a system factor. By discarding this deal, the trader insures himself of an inaccurate calculation, which was caused by the influence of luck, rather than a well-thought-out strategy.
Some traders also consider the percentage of losing and profitable deals. At first glance it seems that the most successful option is a high percentage of deals which brought a good income, but this statement is wrong. Often traders are faced with the fact that at first there are deals with losses, but insignificant, and then there are profitable deals. And such a variant is also considered to be successful.
To calculate the profit factor it is necessary to record the results of your activity. For this purpose, a trader’s diary is used, where the results of transactions are recorded, important parameters are noted. And then all this is used for calculation, the results of which are used to build their strategy.