Profit Factor
Profit Factor = Sum of Earnings / Sum of Losses. Profit factor of a strategy is very different from the Net Profit of a strategy. For example, Strategy A starts with $100,000 and in ten years grows to $1,000,000 (Net Profit of $900,000), but in Year 5 loses 80% of its $500,000 value at that time (drawdown of $400,000). Strategy B starts with the same $100,000 and grows to $900,000 (Net Profit of $800,000) in ten years, but in Year 5 loses only 20% of its $400,000 value at that time (drawdown of $80,000). The Net Profit from Strategy A is $900,000 and its Profit Factor is $900,000 / $400,000 = 2.25 The Net Profit from Strategy B is $800,000, but its Profit Factor is $800,000 / $80,000 = 10.00 Gross Profit optimizes for maximum reward. Profit Factor optimizes for maximum reward to risk, or maximum dollar of reward for each dollar of risk. Optimizing for Profit Factor will yield different strategies than optimizing for Net Profit. |