Metrics guide
Backtesting Metrics Explained
Backtesting metrics summarize return, risk, and trading behavior. No single metric is sufficient: evaluate profitability, drawdown, variability, sample size, exposure, and costs together.
Return and trade metrics
Total return measures cumulative change; CAGR expresses a smoothed annual growth rate. Win rate needs average wins and losses for context. Profit factor divides gross profit by gross loss, while expectancy estimates average outcome per trade.
Risk-adjusted ratios
Sharpe compares excess return with total volatility. Sortino uses downside deviation. Calmar compares annualized return with maximum drawdown. Their assumptions and sampling frequency must be consistent.
Sample and exposure context
Trade count, holding period, market exposure, and turnover help explain how results were produced. A high metric based on few observations can be fragile.
Research checklist
- Return and drawdown together
- Trade count and dependence
- Gross versus net results
- Benchmark and annualization conventions
Questions and answers
What is the Sharpe ratio?
Sharpe ratio is excess return divided by return volatility, usually annualized. It treats upside and downside variability alike.
What is the Sortino ratio?
Sortino ratio compares excess return with downside deviation, focusing the denominator on returns below a chosen target.
What is profit factor?
Profit factor is gross profit divided by gross loss. Values above one mean historical gross profits exceeded historical gross losses before considering broader risk context.