Key Backtest Metrics Explained

Total Return is the simplest metric — how much money did the strategy make? But it tells you nothing about risk. A 100% return sounds great until you learn there was a 90% drawdown along the way.

Maximum Drawdown measures the largest peak-to-trough decline. It tells you the worst-case scenario you would have experienced. Most traders care more about drawdown than total return.

The Sharpe Ratio measures risk-adjusted returns. It divides excess return by volatility. A Sharpe above 1.0 is decent, above 2.0 is excellent. Most legendary hedge funds operate around 1.5-2.5.

Win Rate is the percentage of trades that were profitable. A 40% win rate can be highly profitable if your winners are much larger than your losers. Don't fixate on win rate alone.

Profit Factor is total gross profit divided by total gross loss. A profit factor above 1.5 is solid. Below 1.0 means the strategy loses money. This single number tells you a lot about strategy quality.