Key Metrics Explained
Key Metrics Explained
A comprehensive guide to all performance metrics shown in backtest results. Understanding these metrics is essential for evaluating strategy quality.
Profitability Metrics
Total Return (%)
Percentage return on initial deposit.
Total Return = (Final Balance - Deposit) / Deposit × 100
Profit Factor
Ratio of gross profit to gross loss. Above 1.0 means profitable.
Profit Factor = Gross Profit / |Gross Loss|
| Value | Interpretation | |-------|---------------| | < 1.0 | Unprofitable | | 1.0–1.5 | Marginally profitable | | 1.5–2.0 | Good | | 2.0–3.0 | Very good | | > 3.0 | Excellent (verify not overfitted) |
Win Rate
Percentage of trades that were profitable.
Win Rate = Winning Trades / Total Trades × 100
Win rate alone doesn't determine profitability. A 30% win rate with 5:1 reward/risk is more profitable than a 70% win rate with 0.3:1 reward/risk.
Expectancy
Average expected profit per trade.
Expectancy = (Win Rate × Avg Win) - (Loss Rate × Avg Loss)
Positive expectancy = strategy has an edge over time.
Risk Metrics
Max Drawdown (%)
Largest peak-to-trough decline in account balance.
Max Drawdown = (Peak Balance - Trough Balance) / Peak Balance × 100
| Value | Risk Level | |-------|-----------| | < 10% | Low risk | | 10–20% | Moderate | | 20–30% | High | | > 30% | Very high — most traders can't tolerate this |
Sharpe Ratio
Risk-adjusted return — higher is better. Measures return per unit of volatility.
Sharpe = Mean(Trade Returns) / StdDev(Trade Returns)
| Value | Interpretation | |-------|---------------| | < 0 | Losing money | | 0–1.0 | Below average | | 1.0–2.0 | Good | | 2.0–3.0 | Very good | | > 3.0 | Excellent (may indicate overfitting with few trades) |
Recovery Factor
How quickly the strategy recovers from drawdowns.
Recovery Factor = Total Net Profit / Max Drawdown (absolute $)
Higher = better. A value of 5+ means the strategy generates 5× its worst drawdown in profit.
Trade Quality Metrics
MFE (Max Favorable Excursion)
The highest unrealized profit a trade reached before closing. Shows how much profit was "on the table."
MAE (Max Adverse Excursion)
The deepest unrealized loss a trade reached before closing. Shows how much stress the trade endured.
Average Win / Average Loss
Avg Win = Total Profit from Winners / Number of Winners
Avg Loss = Total Loss from Losers / Number of Losers
Payoff Ratio = Avg Win / Avg Loss
Activity Metrics
Trade Count
Total number of completed trades. More trades generally means more statistical significance.
| Trades | Confidence | |--------|-----------| | < 30 | Low — results may be random | | 30–100 | Moderate — patterns emerging | | 100–500 | Good — statistically meaningful | | > 500 | High — robust sample |
Total Commission
Sum of all trading fees. Important for high-frequency strategies where fees can erode profits.
Metric Relationships
Understanding how metrics relate to each other:
| If... | Then... | |-------|---------| | High win rate + low PF | Average wins are too small relative to losses | | Low win rate + high PF | Few wins but they're much larger than losses | | High Sharpe + few trades | May be overfitted — not enough data | | Low drawdown + low return | Strategy is too conservative | | High return + high drawdown | High risk for the reward |
Tip: No single metric tells the full story. Always look at metrics together. A strategy with Sharpe 2.0, PF 1.8, max DD 15%, and 100+ trades is much more trustworthy than one with Sharpe 5.0, PF 4.0, max DD 5%, but only 10 trades.
FAQ
Q: What's the most important metric? A: There's no single answer, but Profit Factor and Max Drawdown together give the best quick assessment. A PF > 1.5 with DD < 20% is a solid starting point.
Q: Can a low win rate strategy be profitable? A: Absolutely. Trend-following strategies often have 30-40% win rates but large average wins that outweigh frequent small losses.
Q: Why might Sharpe be unreliable? A: With very few trades (< 30), Sharpe can be misleadingly high due to insufficient sample size.