[Read and Learn Realistic Investment Course in 3 Minutes] Lecture 5: Profit Factor is Determined by Win Rate and RR
Today's conclusion
PF is determined by two things: win rate and RR (risk-reward).
Looking at only one of them does not tell you whether the method is profitable.
Split PF into two factors
Last time I wrote that PF＝"total wins ÷ total losses." Here, I will break down this total wins and total losses a little more.
Total wins equals "number of wins × average win per win." Total losses equals "number of losses × average loss per loss." Dividing these gives PF as the product of two ratios.
PF ＝ ratio of counts of wins to losses × ratio of win size to loss size
The former "ratio of counts" is determined by win rate. The latter "ratio of sizes" is RR (risk-reward). If the average win is 20,000 and the average loss is 10,000, RR is 2.
For example, with a win rate of 50%, the numbers of wins and losses are the same, so the ratio of counts is 1. If RR is 2, PF is 1 × 2 = 2.0.
How PF changes with win rate and RR
※ This calculation does not consider costs. The gray text indicates PF below 1, and the colored cells show the previous guideline of "promising" at 1.5–3.0.
Even with the same PF2.0, there are combinations like "win rate 40% × RR 3" and "win rate 50% × RR 2." Even with a win rate of 70%, if RR is 1, PF is 2.33, which is not much different from PF2 with win rate 40% × RR 3.
The bottom-right cell is rarely achievable
In the bottom-right of the table, with a win rate of 70% and RR 3, PF would be 7.0. If such a method existed, it would be ideal.
In reality, it rarely does. If you place profit targets far away, trades often fail to reach them and win rate falls. If you place targets close, win rate rises but RR falls. Increasing one tends to decrease the other.
Therefore, when evaluating a method, do not simply celebrate that "win rate is high" or "RR is large." Instead, multiply the two and think together. That is what evaluating PF is about.
Today's check
Calculate your own trading win rate and RR (average win ÷ average loss), and check where you fall in the table above.
It should roughly match the PF calculated last time.
Next time teaser
Next time, we will discuss “Win rate 50% · RR 1:2 makes PF exactly 2.” I will explain why this particular combination in the middle of the table is used as the standard for this course.
Plug TSUBAKURO’s figures into this formula
My TradingView strategy sold as TSUBAKURO is designed with RR2, placing the profit target at twice the stop loss. Backtest on XAUUSD 1-hour data (January 2025–October 2026, 39 runs) yielded a win rate of 56.4%.
Plugging this into the formula gives PF about 2.59. The actual backtest PF was 2.56, almost the same. A slight discrepancy is due to fees and the effect of position sizing based on capital. Since this is based on past data, it does not guarantee future results.
※This article is intended to provide information to help with investment decisions and does not advocate buying or selling any particular financial instrument. The numbers in the article are for explanation and do not guarantee future results. In margin trading such as FX and CFD, there is a risk of losses exceeding the initial investment. Please make investment decisions at your own responsibility.