Reading Backtest Results
Win rate alone is meaningless. Here's what to actually analyze.
Researched and written by Laurent The Metrics That Matter
After your backtest, you have a spreadsheet of trades. Most traders calculate win rate and stop there. That's a mistake. Win rate without context means nothing. Here are the metrics that actually tell you whether your strategy is viable:
1. Expectancy
Expectancy is the average profit or loss per trade, expressed in R (units of risk). It tells you: "For every dollar I risk on this strategy, how much do I expect to make?"
Example A: 42% win rate, average win = 2.5R, average loss = 1R
Expectancy = (0.42 × 2.5) − (0.58 × 1.0) = 1.05 − 0.58 = +0.47R per trade
Example B: 65% win rate, average win = 0.8R, average loss = 1R
Expectancy = (0.65 × 0.8) − (0.35 × 1.0) = 0.52 − 0.35 = +0.17R per trade
Strategy A is nearly 3× more profitable per trade despite losing 58% of the time.
2. Profit Factor
Profit Factor = Total profit from winning trades / Total loss from losing trades
- Below 1.0: Losing strategy.
- 1.0 to 1.5: Marginal. Might break even after costs.
- 1.5 to 2.0: Solid strategy. Likely profitable after costs.
- Above 2.0: Excellent. Very robust edge.
3. Maximum Drawdown
Max drawdown is the largest peak-to-trough decline in your account during the backtest period. If your account grows to $12,000 and then falls back to $9,500 before recovering, the max drawdown was $2,500 or 20.8%.
This is the most psychologically important metric. A strategy might show 30% annual returns, but if the max drawdown was 45%, many traders would have quit at −20% and missed the recovery. Always ask: "Could I have actually stayed in this strategy through its worst period?"
4. Win Rate in Context
| Win Rate | Minimum R:R to Break Even | Notes |
|---|---|---|
| 30% | 1:2.33 | Low win rate strategy. Big winners needed. Psychologically hard. |
| 40% | 1:1.5 | Common for trend-following strategies. |
| 50% | 1:1 | Barely break even. Need >1:1 to profit after costs. |
| 60% | 0.67:1 | High win rate but small wins often mean large losses when wrong. |
What Good Backtest Results Look Like
There's no single "correct" profile. Trend-following strategies tend to have low win rates (30-45%) but high R:R ratios. Counter-trend strategies tend to have high win rates but small wins. Both can work if the expectancy is positive.
What you're looking for: positive expectancy, profit factor above 1.5, max drawdown at a level you could psychologically survive, and performance across different market conditions (not just a cherry-picked trending year).
Key Takeaways
- • Expectancy = (Win% × Avg Win) − (Loss% × Avg Loss). Must be positive to be profitable.
- • A 35% win rate with 1:3 risk-reward can be more profitable than a 65% win rate with 1:0.8.
- • Profit factor = gross profit / gross loss. Above 1.5 is good. Above 2.0 is excellent.
- • Maximum drawdown tells you the worst losing streak. Ask: can you psychologically survive this?