> ## Documentation Index
> Fetch the complete documentation index at: https://kalpi.ai/docs/llms.txt
> Use this file to discover all available pages before exploring further.

# Profit Factor

> Measure the structural profitability of a strategy by comparing gross gains against gross losses.

**Profit Factor** is one of the most reliable metrics for evaluating the raw efficiency of a trading system or portfolio strategy. It strips away complex compounding mathematics to answer a fundamental question: *For every single rupee this strategy lost, how many did it bring in?*

## The Formula

The calculation isolates your absolute upside versus your absolute downside over a specific testing window:

$\text{Profit Factor} = \frac{\text{Gross Profit}}{\text{Gross Loss}}$

## Evaluating Your Score

Unlike total return metrics, which can be skewed by a single massive winner, the Profit Factor gives you a clear look at your strategy's structural consistency.

| Profit Factor Range | Classification | Tactical Reality |
| :- | :- | :- |
| **Below 1.0** | Unprofitable | The strategy is losing capital. The cost of losing trades completely eclipses all gains. |
| **1.0 to 1.49** | Moderately Profitable | The system breaks even or makes a small profit, but is highly vulnerable to transaction costs and slippage. |
| **1.5 to 2.0** | Strongly Profitable | The institutional sweet spot. The strategy generates robust alpha with a healthy margin of safety. |
| **Above 2.0** | Exceptionally Profitable | Highly efficient system. Note: Double-check for overfitting or lookahead bias if backtesting smooth data. |

> [!NOTE]
>
> **Strategic Rule:** A strategy with a Profit Factor of 1.75 means that if your losing trades collectively lost ₹1,00,000, your winning trades pulled in ₹1,75,000 over the exact same period.


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