Strategy and performance
Profit factor
Gross profit divided by gross loss across a sample of trades. A profit factor above 1 means the strategy made money; below 1 means it lost, whatever the win rate suggests.
GFN’s figure
Profit factor ignores sequence, which is precisely what GFN's 8% floor tests. Pair it with the worst historical peak-to-trough before deciding an account size.
In detail
Profit factor,explained
Profit factor is the most compact summary of a track record, and it is inflated by a small sample or by one outsized winner. Checking the figure with the largest win removed is a quick reality test.
It says nothing about drawdown, which is the part that decides whether a prop account survives. A strategy with a good profit factor and a deep worst losing run still breaches a fixed floor.
Related
Terms thatcome with it
Most rules only make sense next to the ones they interact with. These are the entries this one depends on.
Expectancy
The average result of a trade over a large sample, combining win rate and average win and loss. A positive expectancy is necessary for a strategy to work and not sufficient for it to pass an evaluation.
Win rate
The proportion of trades that finish profitable. On its own it says nothing useful - a 90% win rate with one outsized loss and a 35% win rate with large winners can produce the same result.
Peak-to-trough
The decline from an equity curve's highest point to its lowest subsequent point before a new high is made. It is the standard way of stating how deep a strategy's worst historical losing run was.
Sharpe ratio
Return above a benchmark cash rate, divided by the volatility of those returns. It measures how much variability was accepted per unit of return, so a smoother equity curve scores higher.
Backtesting
Running a strategy over historical data to estimate how it would have performed. Useful for rejecting ideas, weak as evidence for accepting them, because the result is fitted to data already seen.
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