Reading your results

Your report card

After a backtest or a batch of practice trades, you get a list of results. This lesson shows which numbers to read, and which one fibs.

The five numbers

1. Number of trades. Check this first. Every other number is shaky if it's small. 10 trades is a rumor. 100 trades is starting to be evidence.

2. Win rate. The percent of trades that made money. 6 wins out of 10 trades is 60%.

3. Profit factor. All the money from winners divided by all the money from losers. Above 1 means it made money overall. Below 1 means it lost. A profit factor of 1.5 means for every $1 lost, it made $1.50.

4. Expectancy. The average amount made or lost per trade. You met it in the Fruit level. You want it positive.

5. Max drawdown. The biggest drop from a high point in your account to a low point after it. It's the worst losing stretch you'd have had to sit through. You can see it on your equity curve, the line of your account balance over time:

A worked example

Here are two made-up strategies, 20 trades each. (20 trades is too few to trust, but it keeps the math simple.)

Strategy A: 8 wins of $150 each on average, and 12 losses of $50 each on average.

• Win rate: 8 out of 20 = 40%
• Money from winners: 8 x $150 = $1,200
• Money from losers: 12 x $50 = $600
• Profit factor: $1,200 / $600 = 2.0
• Expectancy: $1,200 minus $600 = $600 total, divided by 20 trades = +$30 per trade

Strategy B: 18 wins of $20 each on average, and 2 losses of $250 each on average.

• Win rate: 18 out of 20 = 90%
• Money from winners: 18 x $20 = $360
• Money from losers: 2 x $250 = $500
• Profit factor: $360 / $500 = 0.72
• Expectancy: $360 minus $500 = minus $140 total, divided by 20 trades = minus $7 per trade

Strategy B wins 9 times out of 10 and still loses money. Strategy A loses more often than it wins and makes money.

Why win rate alone lies

Win rate only counts how often you win. It ignores how much. A strategy that grabs tiny profits and lets losses run can have a beautiful win rate and a shrinking account. That's why "90% win rate!" is a favorite line of people selling bad strategies. Always ask: "And how big are the losses?"

Reading them together

• Too few trades? Don't trust anything yet. Keep testing.
• Profit factor below 1, or negative expectancy? The rules don't work as they are.
• Positive, but a huge max drawdown? Be honest: could you sit through that without quitting or breaking rules? If not, risk less per trade.
• Leave room. These numbers come from the past. Real trading is usually a bit worse than a backtest, so don't plan around the best case.

Remember

• Check the number of trades first. Small samples fool you.
• Profit factor above 1 and positive expectancy mean the rules made money.
• Max drawdown shows the worst stretch you'd have to survive.
• Win rate alone lies, because it ignores how big the wins and losses are.