Backtest Metrics Explained: Profit Factor, Drawdown and Win Rate
What profit factor, maximum drawdown, win rate, average win and average loss actually tell you about a trading strategy, and how to read them together.
Total PnL is not enough
Total profit tells you the outcome but nothing about the path. Two strategies can both end at the same profit while one suffers a deep loss along the way. The other metrics describe risk and consistency.
Profit factor
Profit factor is gross profit divided by gross loss. A value of 1.0 means breakeven before costs, and above 1.0 means winners outweigh losers. Very high values on a small number of trades are usually noise, so consider the trade count next to it.
Maximum drawdown
Maximum drawdown is the largest fall from an equity peak to a later low. It shows the worst stretch you would have had to sit through. If you could not tolerate that loss in practice, the strategy is too risky for your capital regardless of its total return.
Win rate, average win and average loss
A high win rate does not guarantee profit. A strategy that wins 70 percent of trades but loses three times as much on each loser can still lose money. Read win rate together with the ratio of average win to average loss.
Trend-following systems often win less than half of their trades and still profit because winners are large. Mean-reversion systems tend to be the opposite.
Monthly breakdown and exit reasons
The monthly table shows whether profits come steadily or from a lucky month. The exit reason count shows how trades end: stop loss, target, signal reversal or end of day. If most exits are end-of-day, your stops and targets may rarely matter.
Ready to try it? Open the backtester and run your strategy on your own candles.