Profit Factor is a value that represents the ratio of gross profits to gross losses. A profit factor of 1 or greater denotes a profitable system, whereas any profit factor below 1 determines a losing system. In this section, we will observe the profit factors generated across the varying backtests and what they mean. The formula for profit factor is as follows:
In this section, we will be discussing the profit factor of the 6-year, 2-year, and 1-year backtests. Based on our backtests, we get the following profit factors for the tested securities:
From these results, we can then derive the average profit factor of each timeframe to be:
Based on the average profit factors calculated in the table above, we can come to the conclusion that the ratio of gross profits to gross losses is higher in more liquid markets. This makes sense due to the algorithm's core logic performing better in more liquid conditions.
The average profit factors are also a good indication that the algorithm performs strongly regardless of market conditions. Due to the design of generating consistent returns, we expect not to see a very high profit factor as we do not want to be taking risky positions which may go against this principle.