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PF - Profit Factor


while i'm certain most (possibly some, hopefully all
) traders 'round har keep a good record of their trades. well, i came across a very simple measure (in an ET thread) for Profit Factor. here it is:

PF = Net Profit / Gross Loss

so, let's say you grossed $1,000. then you had $50 in commissions. plus, you had $200 in losses. So you would have:

GP (Gross Profit) = 1000
GF (Gross Fees) = 50
TL (Total Loss) = 200
NP (Net Profit) = 1000 - 50 - 200 = 750
GL (Gross Loss) = 1000 - 750 = 250

PF = NP / GL = 750 / 250 = 3.0

this gives you a good idea how much it cost you to do business today ($250) and what kind of profit margin you produced (3.0 or 300%). now, obviously, this simple version doesn't include other business expenses (i.e. data subscription fees, charting fees, platform fees, internet fees, advisory fees, and so forth). you could easily add up your monthly fees and figure out how much it cost you each day to do business even if you don't make a single trade. then you would have an even more realistic, more telling PF number. another option would be to calculate it on a per trade basis.

again, nothing groundbreaking or unheardof, but possibly overlooked.

enjoy!

btw: obviously, you could also go through a similar process but also take into account LFT (Loss From Top). in my mind, that would be more effective to get an idea of setup or strategy effectiveness. in other words, you may discover that you give up / return more profits on a more regular basis using Setup A versus Setup B or C. anyway, have fun with it!
quote:
Originally posted by day trading

Interesting figures omni. I think that you duplicated Ninja with Trading Platform because they are the same thing... not?

But I get your point about how much a trader can rack up in fixed costs. I think that this lacks context because traders who are racking up those sorts of costs aren't trading 1 contract, they are trading many more than that and so I think that the fixed costs are probably in the same ratio to profits through the spectrum.



actually, i used NT a seperate cost. in fact, most of the Trader B scenario i got from a couple of people i have known and talked to (from different trading rooms/boards).

sadly, same goes for the context. the trader in mind literally traded 1cc on 10k and had nearly 1.5k in monthly fixed expenses. that meant just to break even, he had to net about 15% per month. he was averaging 150-250 profit per day, so that obviously helped smooth out the figures a bit. but you are right, it is easy to start spending heavily on things a trader 'needs'. btw, eventually the trader who was the main inspiration for Trader B did re-evaluate his situation, made some adjustments, and came out looking much more like Trader A (and did not experience any noticeable performance degrade).

anyway, thanks again for your comments and input.
quote:
Originally posted by omni72

quote:
Originally posted by day trading

From those calculations it looks like a figure of 1.0 or 100% is a bit misleading because if I've understood it correctly then that sort of figure would mean break-even. 100% usually means that you made twice as much as you lost.


though i am not one to advocate 'fuzzy math'
, this may come down to a matter of mathematical semantics. in my mind, if i want to know how much it will cost to make a buck ($1) and i give you $.25 and you give me $1.00, i had a 3.0 PF because my profit equals three times what it cost me to make that profit. if i gave you $.50 and you gave me $1.00 i would have a 1.0 PF because my profit equals 100% of my cost. to me break even would be i give you $1.00 and you give me $1.00 producing a PF of zero. and if that happened, i'd stop doing business with you cuz yer no fun [:P]

i apologize if all i did was restate my original thought - i wasn't trying to create a circular argument
. i think we can both be right (warm fuzzies for everybody!!), because i think the most important point is to find some measure or metric that lets you the trader have an ongoing and easily obtainable idea where you stand and how you are doing.

regarding fixed costs, you made some good points and great suggestions. again, the main gist would be to make sure, one way or another, you remain cognizant of how much it cost - fixed and variably - for you to do business. it's all well and good if you have a high PF , high W/L ratio, low draw down and so forth, but each month spend $5,000 to make $5,100.

obviously, i'm not suggesting anyone EVER use business expenses as a reason to put on a trade. just the opposite; i think traders should be fully aware what it takes for them to do business and whether or not they truly have a realistic chance to turn trading into a viable, income-producing career BEFORE the market opens. as time progresses and my eductation advances, i become more and more sold on the idea that there is very little work that should be going on during the trading day. prepare. execute. analyze. repeat. notice the absence of 'think' and 'hope' and 'wish'.

as always, thank you for your insight and contribution.




Actually PF of 1 is breakeven. Anything less is a loss.
quote:
Originally posted by zarni

quote:
Originally posted by omni72

quote:
Originally posted by day trading

From those calculations it looks like a figure of 1.0 or 100% is a bit misleading because if I've understood it correctly then that sort of figure would mean break-even. 100% usually means that you made twice as much as you lost.


though i am not one to advocate 'fuzzy math'
, this may come down to a matter of mathematical semantics. in my mind, if i want to know how much it will cost to make a buck ($1) and i give you $.25 and you give me $1.00, i had a 3.0 PF because my profit equals three times what it cost me to make that profit. if i gave you $.50 and you gave me $1.00 i would have a 1.0 PF because my profit equals 100% of my cost. to me break even would be i give you $1.00 and you give me $1.00 producing a PF of zero. and if that happened, i'd stop doing business with you cuz yer no fun [:P]

i apologize if all i did was restate my original thought - i wasn't trying to create a circular argument
. i think we can both be right (warm fuzzies for everybody!!), because i think the most important point is to find some measure or metric that lets you the trader have an ongoing and easily obtainable idea where you stand and how you are doing.

regarding fixed costs, you made some good points and great suggestions. again, the main gist would be to make sure, one way or another, you remain cognizant of how much it cost - fixed and variably - for you to do business. it's all well and good if you have a high PF , high W/L ratio, low draw down and so forth, but each month spend $5,000 to make $5,100.

obviously, i'm not suggesting anyone EVER use business expenses as a reason to put on a trade. just the opposite; i think traders should be fully aware what it takes for them to do business and whether or not they truly have a realistic chance to turn trading into a viable, income-producing career BEFORE the market opens. as time progresses and my eductation advances, i become more and more sold on the idea that there is very little work that should be going on during the trading day. prepare. execute. analyze. repeat. notice the absence of 'think' and 'hope' and 'wish'.

as always, thank you for your insight and contribution.




Actually PF of 1 is breakeven. Anything less is a loss.



we've already adressed it, but a profit factor of 1 is not breakeven. if you spend $1 to make $2, then you have a PF of 1:

net profit: $1
gross loss: $1
PF: 1.0

that is clearly not breakeven. that is 100% profit or a PF of 1.0