Before you even start trading with any forex software system, you can find out if your forex strategy is profitable by checking out this number. This number is the Profit Factor. It measures the profitability of the strategy that you are using by dividing the total profit over the total losses incurred. When you use MetaTrader, it defines this Profit Factor as Gross Profit divided by Gross Loss, but it still means the same thing.
Forex Software System Trading – How To Calculate The Profit Factor
For example, let’s say we have just tested our forex strategies, and from our test results it shows that we made $5,000 and lost $3,000. To calculate our Profit Factor, we divide $5,000 / $3,000.
Total Profits ($5,000) / Total Losses ($3,000) = Profit Factor of 1.67
How do you interpret this number? In this case, our forex strategy shows us that our winning trades are 1.67 times our losses. In general, the higher the profit factor, the better the trading system. Anything over 1.0 means that our trading system is profitable and anything less than 1.0 indicates that our system has been unprofitable over the testing period.
How To Use Profit Factor In Forex Software System Trading
If your system shows a profit factor less than 1.0, it means that you have to relook at the rules and parameters used in your forex strategy. And if you have a profit factor of 2.0, it means you have a solid forex trading system that has a strong possibility of being profitable in real live trading. Better yet, if you account for slippage (with any other negative factors) and still turn out profitable, you have a pretty decent forex strategy.
Is Having A Higher Profit Factor Always Better?
In general, yes. But if you are getting profit factors of 4.0, 5.0 or more, it is advisable that you recheck your trading parameters. It is rare to find any trading system to have such a high profit factor, so I would suggest you look at your trading results with a skeptical eye and review your test results. Any forex trading strategy that has a profit factor of 3.0 is considered to be very good.
Most of the time, tests will be done using historical prices or in a demo account. If this is the case, almost always the live trading results will be worse than what you get during the test. This is a result of liquidity issues, slippage, and any other possible factors like loss of internet connections and power failure.
In live trading, you are competing with other forex traders to get filled at a certain price while in demo testing your orders are “always” filled at that price. Because live trading results are usually worse, we want our profit factor to be as high as possible during our tests. This is so when it comes to live trading, we have some buffer to still have a profitable automated forex trading strategy.
Automated Forex Trading Software with Positive Profit Factors
When you finally decide on an automated forex trading software, you know the key number that you have to look at. There are only a couple of commercially available automated forex trading systems that have positive profit factors in real time trading, and these are the ones that you can consider including into your forex trading arsenal.
For An Automated Forex Trading System that trades less frequently but is profitable on default settings:
Read our Forex MegaDroid Review