Profit factor and expectancy, explained with examples

Most traders look at one number first: win rate. It is also the easiest number to misread. Here are the four metrics that give a more honest picture, with small examples.

Win rate is not enough

Imagine two traders, each making 10 trades.

• Trader A wins 7 of 10 trades, but the average win is $50 and the average loss is $150.
• Trader B wins 4 of 10 trades, but the average win is $300 and the average loss is $100.

Trader A has a 70% win rate and loses money: 7 x $50 = $350 won, 3 x $150 = $450 lost. Trader B wins only 40% of the time and makes money: 4 x $300 = $1,200 won, 6 x $100 = $600 lost.

Profit factor

Profit factor = gross profit / gross loss.

For Trader A it is $350 / $450 = 0.78. For Trader B it is $1,200 / $600 = 2.0.

Above 1.0 means the winners outweigh the losers. Below 1.0 means the strategy loses money. A very high number from a small number of trades usually means you simply haven't had a bad stretch yet, so look at it over a meaningful sample.

Expectancy

Expectancy = (win rate x average win) - (loss rate x average loss). It is what you make on average per trade.

• Trader A: 0.7 x $50 - 0.3 x $150 = -$10 per trade
• Trader B: 0.4 x $300 - 0.6 x $100 = +$60 per trade

If you also record how much you risked on each trade, you can express expectancy in R (multiples of your risk), which lets you compare trades of different sizes.

Average win to average loss

Divide your average win by your average loss. Trader B's ratio is 3.0, while Trader A's is 0.33. Strategies with a low win rate can still work if the ratio is high enough, and strategies with a high win rate need the ratio to stay respectable.

Maximum drawdown

Drawdown is how far your account falls from its previous high. Your maximum drawdown is the worst such fall. It tells you what the strategy costs to hold: two strategies with the same profit can feel very different if one dropped 30% on the way.

Watch your recovery factor too, which is net profit divided by maximum drawdown. It shows how much you earned for the pain you went through.

Putting it together

No single number is enough. A useful routine is to review these together every week, then ask which setups, times of day or mistakes are pulling them up or down. That is what a trading journal is for: once your trades are imported, the metrics update automatically, and tagging trades by setup and mistake turns the numbers into something you can act on.

This article is educational and is not financial advice.