Reading a backtest: profit factor, win-rate & drawdown
A green equity curve sells. The numbers underneath tell you whether it's real. Here are the three that matter and how to read them honestly.
Profit factor
Profit factor = gross profit ÷ gross loss. Above 1.0 is profitable; below 1.0 loses money.
- < 1.2 — fragile. A little extra cost or slippage can flip it negative.
- 1.3–1.8 — a workable edge for most retail strategies.
- > 2.0 — strong, but be suspicious: check the sample size and whether it's curve-fit.
Win-rate (and why it can lie)
Win-rate is the share of trades that closed green. On its own it's almost meaningless — a 35% win-rate with big winners and small losers can crush a 70% win-rate that gives it all back on a few large losses. Always read win-rate next to the average win/loss size.
A high win-rate with no stop-loss is the classic trap. It looks great until the one trade that doesn't come back wipes out months of small wins. Drawdown is where that hides.
Max drawdown
Max drawdown is the largest peak-to-trough drop in equity. It's the number that tells you whether you could actually sit through this strategy. A +40% backtest with a 35% drawdown is psychologically untradeable for most people; the same return at 7% drawdown is a different animal.
The traps to check before trusting any backtest
- Sample size — 20 trades prove nothing. Look for hundreds across different conditions.
- Gross vs net — were spread, slippage and fees modeled? A gross backtest flatters every edge.
- Regime — did it only work in one trend? Mean-reversion edges die in strong trends and vice versa.
- Generalization — does the same logic work on other assets, or is it tuned to one ticker?
In Formion, every strategy's trades flow into Trade-History with these numbers attached, so you can audit the same figures we quote — including the losing months. That's the standard to hold any strategy to, ours included.
Put this lesson to work in the live terminal.
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