This week’s free trading tool takes a queue from last week’s Profit and Loss Forecaster, but this time it is a profit factor calculator. Here’s the logic behind the calculations:
PF = Net Profit / Gross Loss
In an effort to head off any confusion regarding the actual profit factor, let’s take a look at a stripped down example demonstrating that a PF of 1.0 is not break even. If I paid $1 for a $2 bill, my PF is 1.0 or 100%. Here’s how: $1 (net profit) / $1 (gross loss) = PF of 1. Break even would be, well, break even. Pay $1 for a $1, you have a PF of 0 and you broke even.
For a trading example, if you grossed $1,000, had $50 in commissions, and had $200 in losses, you would have:
GP (Gross Profit) = 1000
GF (Gross Fees) = 50
TL (Total Loss) = 200
NP (Net Profit) = 1000 – 50 – 200 = 750
GL (Gross Loss) = 1000 – 750 = 250
PF = NP / GL = 750 / 250 = 3.0
The result shows you how much it cost you to do business today ($250) and what kind of profit margin you produced (3.0 or 300%). This simple example doesn’t include other business expenses (i.e. data subscription fees, charting fees, platform fees, internet fees, advisory fees, and so forth). You could easily add up your monthly fees and figure out how much it cost you to do business each day, even if you don’t make a single trade. This would give you a more telling PF number as it relates to your business operating costs to trade. Another more granular and trading focused option would be to calculate it on a per trade basis.
Use it here any time you want or download an XLS copy of it:
