Key Trading Metrics for Prop Firms

Profit factor is the ratio of gross profits to gross losses. A profit factor above 1.5 indicates a robustly profitable strategy; above 2.0 is strong; below 1.2 means the strategy barely covers losses and is vulnerable to cost changes. Calculation: sum of all winning trade profits divided by sum of all losing trade losses (absolute values). For prop firm evaluations, a minimum profit factor of 1.5 is a reasonable threshold before attempting a challenge.

Sharpe ratio measures return relative to volatility. A Sharpe ratio above 1.0 means the strategy generates more return per unit of risk than a risk-free investment. For prop firm trading specifically, a modified Sharpe ratio using daily returns versus daily standard deviation helps identify strategies whose equity curves are smooth enough to avoid triggering daily loss limits during normal volatility. Strategies with Sharpe ratios below 0.5 produce equity curves too erratic for prop firm rules.

SQN (System Quality Number) was developed by Van Tharp and combines win rate, average reward-to-risk, and the square root of sample size. SQN = (Average R-multiple / Standard Deviation of R-multiples) * sqrt(number of trades). A score above 2.0 is good, above 3.0 is excellent. For prop firm evaluators, SQN above 1.5 across 100+ backtested trades is a reliable indicator that the strategy has genuine statistical edge rather than luck-derived results.