How to rate a tader based on his profit factor ? How to rate a trading system based on his profit factor ?
You have to consider the win / loss ratio and the draw downs along the way. Most favorable is: - a high percentage of winners. - low draw downs - consistent gains - each time period is net positive - controlled and minimal amount at risk I don't think there is a spreadsheet that you can put this into to compare one trader against the other. If there is then add info about it here....
I think mark douglas talks about this on one of his books... he separated traders in 3 groups guys who lose their shirt... Their equity line looks like a downhill trail... guys who where on a finantial rollercoaster, going up and down on their equity line, going broke and making small fortunes several times in their lifes. guys who are consistent winners. the opposite from the first group...
a simple definition of Profit Factor ...is the profit generated by profitable trades divided by the losses generated by losing trades. A value of 2 would indicate that twice as much money was made from winning trades than was lost from losing trades. Higher values indicate less risk. I find that wins/losses is only part of the picture....This has to be coupled with profit factor and vice versa. I have well more losing trades than winning trades ~80% but the losers are clipped before they can hurt and the winners are left to run. By the definition a trader with a profit factor less than 1 is losing money and is therefore a risk. To answer the question...I think scale has to enter the equation. If i trade only a few hundred shares my profit factor could be enormous but P&L is miniscule whereas I could take massive share lots and have a profit factor tending towards 1 and still have a large P&L. I think with all of these numbers you have to see the context.
Still no one has quoted a figure... Since the profit factor doesn't take into account the sequence of your trades to measure risk/reward, it is better figure to quantify risk/reward than simply dividing net result/max drawdown which depends from the sequence of the trades.
PF has to be weighed with the # of trade opportunities. A PF of 5 that gives 5 signals a year isn't worth as much as a system with 1.5 PF and trades 10 times a day.
Agreed with lescor and most other posters. If you're going to financially rate a trader you need a mix of measures. - how much can be made per day is key (lack of trading opportunities, thin markets etc can make a good system go bad) - is the system reasonable using some measure like profit factor or expectancy (better) to know that its picking a good amount of money out for the amount risked. But a pf of 5 isnt necessarily better than 2 ... as illustrated by lescor. - smoothness - do you want almost every day to be a winner, almost every week to be a winner or almost every quarter to be a winner (long term daily chart trading). But like trading there are no absolutes ... you have to get the right mix for your capabilities, your comfort levels, and the way you want to trade.