**2) Profit factor**

Another statistic that garners lots of attention is the profit factor. This value relates the amount of profit per unit of risk, where values greater than one indicate a profitable system. It is calculated by dividing the gross profit by the gross loss:

*Profit factor = Gross profit / Gross loss*

In theory, this value should be as high as possible. In reality, however, extremely high profit factors during testing rarely correlate in live trading. Many successful trading plans have profit factors that come in over 1.5 and perhaps even as high as 5.0 in extreme cases.

Rather than an outright high number, traders should look for consistency over time, regardless of the trading period, when comparing profit factor values. In other words, a system has a better chance of performing well during live trading if the profit factor values show positive correlation over different time periods. The profit factor should not change dramatically from one time period to another. If it does, it’s a sign the trading system is not reliable.

**3) Percent profitable **

The percent profitable metric also is known as the probability of winning, and is calculated by dividing the number of winning trades by the total number of trades for a specified period:

*Percent profitable = Number of winning trades / Number of total trades*

Again, in theory, this value should be as high as possible. Trading style and strategy type, however, are factors that affect the ideal percent profitable value. Trend-following strategies, for example, tend to have lower percent profitable values — perhaps even as low as 40% —because the trades that do win are typically quite large, and any losing trades are usually closed for a small loss.

Scalping strategies, by comparison, typically rely on winning small amounts of money while risking similar amounts on any one trade. A scalping strategy may generate dozens of trades each trading session. Because each win is relatively small, and each loss tends to be close in value to the winners, the system requires a higher percent profitable value to make money over time. Like the profit factor, percent profitable values should remain fairly consistent across various periods.

#### About the Author

Jean Folger is the co-founder of and system researcher with PowerZone Trading, LLC.