European readers comparing signal services, strategy providers or published trading accounts usually meet the Sharpe ratio first. We covered its limits in our guide on drawdown and Sharpe before you trust a track record. This article goes one step further, to the metrics that sit beside Sharpe on most statistics pages: profit factor, expectancy, the Sortino ratio and the Calmar ratio. Each answers a different question, and each can be flattered.
What is profit factor in trading?
Profit factor is the sum of all winning trades divided by the absolute sum of all losing trades. Above 1.0 the record made money before any further costs; below 1.0 it lost money. Myfxbook, the independent verification service many traders use, shows profit factor alongside expectancy in its account statistics.
Take a hypothetical record of 40 closed trades:
- 22 winners totalling €6,600, an average win of €300
- 18 losers totalling €4,400, an average loss of about €244
- Profit factor = 6,600 ÷ 4,400 = 1.50
- Expectancy = (6,600 − 4,400) ÷ 40 = €55 per trade
Expectancy is the average result per trade. It turns profit factor into money, and it is the number that has to stay positive after spreads, commissions and financing for a strategy to be worth anything.
What is a good profit factor?
There is no universal threshold, and anyone who quotes one without context is selling something. Three checks matter more than the number itself.
In our example, suppose one of the 22 winners was a single €2,000 trade. Remove it and the record becomes €4,600 of wins against €4,400 of losses: a profit factor of 1.05 and an expectancy of about €5 per trade across the remaining 39. One lucky trade was carrying almost the whole result.
Forty trades is a small sample. A profit factor of 1.5 over 40 trades can easily be noise, as we showed in how many trades a track record needs.
Profit factor is computed from closed trades. A record that keeps losing positions open, or adds to them, can show a high profit factor right up until a large loss is finally realised. Look at the equity and drawdown history, not only closed-trade statistics.
Why use the Sortino ratio instead of Sharpe?
The Sortino ratio divides return by downside deviation instead of total volatility, so it penalises only the months that fall below a target return. Sharpe treats a surprise gain and a surprise loss as equally risky. As the CFA Institute's paper on the ratio puts it, Sortino separates harmful volatility from benign volatility.
The formula is: Sortino = (average return − target) ÷ downside deviation, where downside deviation is the square root of the average squared shortfall below the target, counting months above target as zero shortfall.
How do the three ratios compare on real numbers?
Here are three hypothetical 12-month records, each built from monthly returns. We used a target and risk-free rate of 0% and annualised Sharpe and Sortino by multiplying the monthly ratio by the square root of 12.
| Record | Monthly pattern | 12-month return | Max drawdown | Sharpe | Sortino | Calmar |
|---|---|---|---|---|---|---|
| A: steady | Small gains, small dips | 7.7% | 0.9% | 2.17 | 5.23 | 8.56 |
| B: lumpy upside | Three large up months, small dips | 15.2% | 1.7% | 1.33 | 6.26 | 8.97 |
| C: hidden hole | Smooth gains, two back-to-back losses | 7.9% | 8.1% | 0.85 | 1.21 | 0.97 |
Record B has a lower Sharpe than A only because its big months were up months; Sortino and Calmar both see that. Record C earned almost exactly what A earned, yet it fell 8.1% from a peak along the way, nine times A's worst fall. Calmar exposes that immediately: 0.97 against 8.56.
What is the Calmar ratio?
The Calmar ratio is annualised return divided by maximum drawdown over the same period. Record C: 7.86% ÷ 8.13% = 0.97. It answers a blunt question: how many units of yearly return did this record earn for each unit of its worst fall?
Two cautions apply. A CME Group education paper on drawdown-based measures notes that, unlike Sharpe, Calmar cannot be scaled between time periods, so compare records only over the same window. And maximum drawdown is a single worst event, so a short record that has not yet met a bad market will show a flattering Calmar simply because its worst day has not arrived.
What should you actually do with these numbers?
Use them together, as a checklist rather than a scoreboard:
| Question you are asking | Metric that helps | What can fool it |
|---|---|---|
| Do wins outweigh losses? | Profit factor | One outsized trade; open losing positions |
| What does an average trade earn? | Expectancy | Costs left out of the calculation |
| Is the volatility mostly losses? | Sortino | Short history with few down months |
| Was the return worth the worst fall? | Calmar | Too short a period to have met a bad market |
| Is the ride smooth overall? | Sharpe | Penalising upside spikes |
Then verify the source. A ratio on a marketing page is a claim; the same ratio on an independently verified account is evidence. Our guide on how to read a Myfxbook track record shows what to check, and TIC publishes its own independently verified Myfxbook results on the results page for exactly that reason. Regulation is a separate check: our explainer on ESMA leverage limits in Europe covers the retail rules that apply to the products themselves; the current European measures are described by ESMA, and the UK's product-intervention rules are set out in the FCA Handbook.
Most impressive-looking ratios come from short records, a few large trades or losses that have not been closed yet. None of these metrics predicts the future. They help you ask better questions about the past.
Sources
- CFA Institute, Deborah Kidd, The Sortino Ratio: Is Downside Risk the Only Risk That Matters?
- William F. Sharpe, The Sharpe Ratio
- CME Group education, Marat Molyboga, Portfolio management with drawdown-based measures (Calmar ratio)
- Myfxbook, New Statistics (profit factor and expectancy on account pages)
All records and figures in this article are hypothetical and used only to illustrate the calculations.
Trading carries high risk and you may lose your capital. Past performance does not guarantee future results. Educational only, not investment advice.
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