Understanding Metrics

Learn how to interpret Total Return, Sharpe Ratio, Max Drawdown, Win Rate, Profit Factor, and other backtest performance metrics.

Key Performance Metrics

After every backtest, Backtrex computes a comprehensive set of metrics. Here is what each one means and how to interpret it.

Total Return (%)

The overall percentage gain or loss of your strategy over the test period.

Formula: (Final Equity - Initial Capital) / Initial Capital x 100

Interpretation:

  • Positive = profitable strategy
  • Compare against Buy & Hold return for the same asset and period
  • A 50% return over 5 years is very different from 50% over 1 year

Win Rate (%)

The percentage of trades that were profitable.

Formula: Winning Trades / Total Trades x 100

Interpretation:

  • Above 50% is generally good, but context matters
  • A 30% win rate can still be profitable if winners are much larger than losers
  • Always look at Win Rate alongside Profit Factor

Profit Factor

The ratio of gross profits to gross losses.

Formula: Sum of Winning Trade Profits / |Sum of Losing Trade Losses|

Interpretation:

  • Above 1.0 = profitable (profits exceed losses)
  • Above 1.5 = good
  • Above 2.0 = excellent
  • Below 1.0 = losing strategy

Sharpe Ratio

Risk-adjusted return measure. How much return you earn per unit of risk.

Formula: (Average Return - Risk Free Rate) / Standard Deviation of Returns

Interpretation:

  • Below 0 = losing strategy
  • 0 to 1 = poor to mediocre risk-adjusted returns
  • 1 to 2 = good
  • Above 2 = excellent
  • Above 3 = outstanding

Max Drawdown (%)

The largest peak-to-trough decline in portfolio value during the test period.

Formula: (Trough Value - Peak Value) / Peak Value x 100

Interpretation:

  • Lower is better (less risk)
  • A -30% max drawdown means your portfolio dropped 30% from its peak at some point
  • Most traders find drawdowns above 25-30% psychologically difficult to manage
  • If max drawdown reaches -100%, the strategy caused total capital loss (liquidation)

Average Trade

The average profit or loss per trade.

Interpretation:

  • Positive = each trade generates profit on average
  • Consider in relation to your position size and costs

Number of Trades

Total trades executed during the backtest period.

Interpretation:

  • Too few trades (under 30) = statistically unreliable results
  • Very high trade count on short timeframes may indicate overtrading
  • Aim for at least 30-50 trades for meaningful statistics

Backtest Score (0-100)

Backtrex computes a composite score from six dimensions:

  1. Return Performance: How the strategy performs compared to the asset
  2. Risk Management: Drawdown control and risk metrics
  3. Consistency: How stable returns are over time
  4. Trade Quality: Win rate, profit factor, average trade
  5. Robustness: Number of trades and statistical significance
  6. Risk-Adjusted Returns: Sharpe ratio and related measures

Each dimension uses logarithmic scaling, meaning improvements at higher levels require exponentially better performance.

Score ranges:

  • 0-25: Poor, fundamental issues
  • 25-50: Below average, needs improvement
  • 50-70: Decent, promising foundation
  • 70-85: Good, competitive strategy
  • 85-100: Excellent, top-tier performance

Reading the Equity Curve

The equity curve plots your portfolio value over time. Look for:

  • Smooth upward slope: Consistent profitability
  • Sharp drops: Periods of significant drawdown
  • Flat periods: Times when the strategy is not generating trades
  • Liquidation marker: If equity hits zero, a red marker appears

Monthly Returns Heatmap

The heatmap shows monthly returns in a grid format:

  • Green cells: Profitable months
  • Red cells: Losing months
  • Color intensity: Magnitude of gain/loss

This helps identify seasonal patterns and periods of underperformance.