The Profit Factor must be larger than 1 for a business to be profitable.
Average win * number of wins) / Average loss * number of losses = R * w / (1-w) where R = Average win / Average loss w = win rate, i.e. % number of winners relative to total number of trades
Reorganizing, we have
The formula for w is: PF / (PF + R) while the formula for R is: PF * (1 – w) / w.
A table illustrating the minimal R needed to achieve financial neutrality (PF = 1, assuming no transaction expenses) at various win rates.
When w = 90%, R = 0.11, when w = 80%, R = 0.25, when w = 70%, R = 0.43, when w = 60%, R = 0.11.
R = 0.67 \sw = 50% >>
R = 1 \sw = 40% >>
R = 1.5 \sw = 30% >>
R = 2.33 \sw = 20% >>
R = 4 \sw = 10% >>
R = 9