Understanding Backtesting Metrics

Total Return: +45.2%

What it means: Starting with $10,000, you'd end with $14,520

Good values: Depends on timeframe and risk taken
  - 20%+ annually is excellent
  - Compare to buy-and-hold of the same asset
  - Higher isn't always better (check risk metrics)

Sharpe Ratio: 1.85

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

Interpretation:
  < 0.5  : Poor - not worth the risk
  0.5-1.0: Below average
  1.0-1.5: Acceptable
  1.5-2.0: Good
  2.0-3.0: Excellent
  > 3.0  : Suspicious (possible overfitting)

Max Drawdown: -23.5%

What it means: At the worst point, your account was
down 23.5% from its highest value

Example:
  Account peaks at $15,000
  Drops to $11,475 (down 23.5%)
  Eventually recovers to $18,000

Good values:
  < 10% : Conservative, lower stress
  10-20%: Moderate, typical for trend following
  20-30%: Aggressive but manageable
  > 30% : High risk - can you stomach this?

Win Rate: 42%

What it means: 42% of trades made money, 58% lost

Important context:
  - Win rate alone means nothing
  - A 30% win rate can be highly profitable
  - A 70% win rate can lose money
  - What matters: Win Rate × Avg Win vs Loss Rate × Avg Loss

Example of profitable 40% win rate:
  Win rate: 40%
  Average win: $500
  Average loss: $200

  Expected value per trade:
  (0.40 × $500) - (0.60 × $200) = $200 - $120 = +$80

Profit Factor: 1.65

What it means: For every $1 lost, you made $1.65

Interpretation:
  < 1.0 : Losing money
  1.0   : Breaking even
  1.0-1.5: Marginal
  1.5-2.0: Good
  > 2.0 : Excellent

Sortino Ratio: 2.45

Why it matters: Sharpe treats all volatility as bad.
But if your strategy has big up days and small down
days, Sortino captures that better.

If Sortino >> Sharpe: Your volatility is mostly upside
If Sortino ≈ Sharpe: Volatility is symmetric

Total Trades: 147

Why it matters:
  - Too few (<30): Results may not be statistically significant
  - Too many (>500/year): Transaction costs add up
  - Each trade costs fees and slippage

Warning signs:
  - High returns with <20 trades: Probably lucky
  - Great Sharpe with 5 trades: Not enough data
  - 1000+ trades/year: Fees destroying edge

Calmar Ratio: 1.8

Formula: Annual Return / Max Drawdown

Example:
  Annual return: 36%
  Max drawdown: 20%
  Calmar: 36/20 = 1.8

Interpretation:
  < 1.0: Drawdowns bigger than returns (concerning)
  1.0-2.0: Acceptable
  > 2.0: Good risk-adjusted returns

Example of a solid strategy:
────────────────────────────────
Total Return:     +38.5%
Sharpe Ratio:     1.72
Sortino Ratio:    2.31
Max Drawdown:     -15.2%
Win Rate:         52%
Profit Factor:    1.85
Total Trades:     89
Calmar Ratio:     2.53
────────────────────────────────

This tells us:
✓ Solid returns (38.5%)
✓ Good risk-adjusted performance (Sharpe 1.72)
✓ Asymmetric returns favoring upside (Sortino > Sharpe)
✓ Manageable drawdowns (15.2%)
✓ Slight edge on trade selection (52% win rate)
✓ Winners bigger than losers (Profit factor 1.85)
✓ Enough trades to trust results (89)
✓ Good return per unit of drawdown (Calmar 2.53)