Backtest Metrics Explained: Win Rate, Profit Factor, Drawdown

A backtest produces a wall of numbers, but only a few of them tell you whether a strategy is worth trading. Here is how to read the metrics that matter in a Setup.Cash backtest.

Win Rate Is Not the Point

A high win rate feels good but means little on its own. A strategy that wins 80% of the time can still lose money if the 20% of losers are huge. Always read win rate together with average win and average loss.

Profit Factor

Profit factor = gross profit ÷ gross loss. Above 1.0 is profitable; 1.3–2.0 is a healthy range for many strategies. Below 1.1, small changes in costs can flip the result negative.

Expectancy

Expectancy is the average amount you expect to win (or lose) per trade. It combines win rate and average win/loss into one number:

Expectancy = (Win% × Avg Win) − (Loss% × Avg Loss)

A positive expectancy with enough trades is the foundation of an edge.

R-Multiples

Expressing results in R (multiples of risk) normalizes everything. A trade that risks 1R and makes 2R is +2R regardless of position size. Thinking in R makes strategies comparable and keeps position sizing separate from edge.

Max Drawdown

Max drawdown is the largest peak-to-trough drop in equity. It is the number that decides whether you can actually stick with a strategy. A strategy with great returns and a 60% drawdown is untradeable for most people. Favor smoother equity curves.

Number of Trades

A backtest with 15 trades proves almost nothing. Look for a sample large enough to be meaningful (often 100+), and check that results are not driven by a handful of outliers.

Costs Matter

Always include realistic spread and fees. A strategy that is profitable with zero costs but breaks even with spread is not a strategy. Setup.Cash models spread in the risk node so your backtest reflects reality.

Avoid Overfitting

The more you tweak parameters to maximize a backtest, the more you risk curve-fitting to the past. Signs of overfitting: results that collapse with small parameter changes, or that look perfect on one symbol and terrible on others. Test across multiple instruments and periods.

From Backtest to Paper Trading

Even a clean backtest is historical. Before going live, paper trade the strategy with live prices to confirm execution matches expectations.

The Honest Checklist

Before trusting a strategy, confirm:

• Positive expectancy over a meaningful sample
• Profit factor comfortably above 1
• Max drawdown you can psychologically tolerate
• Stable across symbols and periods
• Realistic costs included

Read these in the backtesting guide, then validate with paper trading before risking capital.