Backtesting Metrics Guide

Understand key metrics to analyze trading strategies and portfolio performance: Sharpe ratio, Sortino ratio, max drawdown, kurtosis, skewness, win rate, profit factor, and more.

Risk-Adjusted Returns

Return per unit of risk

Sharpe Ratio

The Sharpe ratio measures risk-adjusted return by comparing excess return over the risk-free rate to the volatility (standard deviation) of returns.

Sortino Ratio

The Sortino ratio measures risk-adjusted return using only downside deviation (bad volatility), so it does not penalize upside volatility.

Calmar Ratio

The Calmar ratio measures annualized return divided by maximum drawdown, giving return per unit of worst-case loss.

Drawdown Metrics

Peak-to-trough and recovery

Maximum Drawdown

Maximum drawdown (MDD) is the largest peak-to-trough decline in portfolio or strategy value over a given period.

Return Distribution

Skewness, kurtosis, and tails

Kurtosis

Kurtosis measures the “tailedness” of the return distribution—how often extreme outcomes (large gains or losses) occur compared to a normal distribution.

Skewness

Skewness measures the asymmetry of the return distribution—whether large gains or large losses are more frequent.

Performance

Win rate, expectancy, and payoff

Win Rate

Win rate is the percentage of trades (or periods) that are profitable. It does not account for size of wins vs losses.

Expectancy

Expectancy is the average profit or loss per trade, often expressed in currency or as a percentage of risk.

Efficiency

Profit factor and recovery factor

Profit Factor

Profit factor is the ratio of gross profits to gross losses. Values above 1.0 indicate net profitability.

Recovery Factor

Recovery factor is net profit divided by maximum drawdown, measuring how much profit is generated per unit of worst loss.

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