Smart position sizing & risk management

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Risk Management

Profit Factor

Total gross profits divided by total gross losses. Above 1.0 is profitable, above 2.0 is excellent.

What is Profit Factor?

Profit factor is the ratio of gross profits to gross losses. It tells you how many dollars you make for every dollar you lose.

Profit Factor = Gross Profits / Gross Losses

Interpreting profit factor

  • Below 1.0: losing money overall
  • 1.0 - 1.5: marginally profitable, fragile
  • 1.5 - 2.0: solidly profitable
  • Above 2.0: excellent, but may indicate too few trades or overfitting

Related Terms

Max Drawdown

The largest peak-to-trough decline in account value. Measures the worst-case loss experienced.

R-Multiple

A trade's profit or loss expressed as a multiple of the initial risk (R). A 3R trade made 3x what was risked.

Win Rate

The percentage of trades that are profitable. A 45% win rate means 45 out of 100 trades are winners.