The Four Backtest Metrics That Actually Matter
Total return is a marketing number. These four metrics tell you whether a strategy is worth trading.
Most backtest reports drown the trader in numbers. The vast majority do not matter for deciding whether to trade a strategy. Four do.
Sharpe ratio
Sharpe is return divided by volatility. It tells you whether a strategy makes money in a way you can stomach. A 30% return with 60% volatility is harder to live with than 12% return at 8% volatility. Above 1 is decent, above 2 is real, above 3 is suspicious — recheck your data.
Maximum drawdown
The worst peak-to-trough loss the strategy ever experienced. This is the number that decides whether you stick with the strategy or turn it off at the worst possible time. If max drawdown is 40% and you cannot stomach a 40% loss, the strategy is not for you regardless of average return.
Calmar ratio
Annual return divided by max drawdown. It directly answers the question: how much pain do I trade for how much gain? Calmar above 0.5 is workable for most retail traders, above 1 is excellent.
Profit factor
Gross profit divided by gross loss. Profit factor below 1.2 means a small change in market structure can flip the strategy negative. Above 1.5 is healthy.
What to ignore
Total return on its own. Win rate without average win-to-loss ratio. Number of trades without per-trade P&L. These can all be gamed and rarely change a decision.