Backtesting Statistics Explained
Understand the core metrics generated by a backtester to measure strategy robustness, risk profile, and profitability expectations.
The Core Performance Metrics
1. Win Rate
The percentage of total trades that closed in profit. calculated as: (Winning Trades / Total Trades) * 100. A high win rate is not a guarantee of profitability if your losing trades are much larger than your winning trades.
2. Profit Factor
The ratio of gross profits to gross losses. Formula: Gross Profit / Gross Loss. A profit factor above 1.0 means the strategy is profitable. A robust strategy typically has a profit factor between 1.5 and 2.5.
3. Maximum Drawdown
The largest peak-to-trough decline in your account equity curve, expressed as a percentage. It measures the historical capital risk of your strategy. Most institutional traders aim to keep drawdowns below 10%.
4. Sharpe Ratio
A measure of risk-adjusted return. It compares the average return of your strategy to its volatility. A higher Sharpe ratio indicates that you are generating returns with less portfolio volatility.