Performance Metrics
MangoLabs calculates comprehensive performance metrics from backtest results. Understanding these metrics helps you evaluate risk-adjusted returns, consistency, and overall strategy quality beyond simple profit percentages.
Beyond Raw Returns
A strategy with 50% return and low drawdowns can be better than one with 100% return and massive volatility. These metrics help you evaluate risk-adjusted performance and consistency.
Return Metrics
Total Return (%)
Formula: (Final Equity - Initial Equity) / Initial Equity × 100
The overall percentage gain or loss over the entire backtest period. This is the most basic performance measure.
Excellent: >50%
Strong performance
Good: 20-50%
Solid returns
Poor: <20%
Needs improvement
Annualized Return (%)
Formula: (1 + Total Return) ^ (1 / Years) - 1
The return normalized to a one-year period. Allows fair comparison between strategies tested on different time periods. More useful than total return for comparison.
Example: A strategy with 20% return over 6 months has ~44% annualized return. This helps compare it to a strategy with 30% over 1 year (30% annualized).
Risk Metrics
Annualized Volatility (%)
Formula: StdDev(Daily Returns) × √252
Measures how much returns fluctuate day-to-day. Higher volatility = more unpredictable returns and psychological stress. Lower is generally better.
Low: <20%
Stable, predictable
Medium: 20-40%
Moderate swings
High: >40%
Wild, stressful
Max Drawdown (%)
Formula: (Peak - Trough) / Peak × 100
The largest peak-to-trough decline in portfolio value. Represents the worst-case loss an investor would have experienced. Critical for risk management.
Excellent: <15%
Very safe
Acceptable: 15-30%
Manageable
High Risk: >30%
Dangerous
Why it matters: A 50% drawdown requires a 100% return just to break even. Psychologically, most traders abandon strategies after 30-40% drawdowns.
Risk-Adjusted Performance
Sharpe Ratio
Formula: (Annualized Return - Risk Free Rate) / Annualized Volatility
The most widely used metric for risk-adjusted returns. Measures excess return per unit of risk. Higher is better - means more return for the same risk.
<0
Losing money
0-1
Sub-optimal
1-2
Good
>2
Excellent
Real-world context: S&P 500 has Sharpe ~0.5-0.8. Hedge funds target >1.0. Quant funds aim for >2.0. A backtest with Sharpe >2.0 is exceptional.
Sortino Ratio
Formula: (Annualized Return - Risk Free Rate) / Downside Deviation
Similar to Sharpe but only penalizes downside volatility (negative returns). More accurate for strategies with asymmetric return distributions. Higher is better.
When to prioritize: Use Sortino over Sharpe when comparing strategies that have different upside/downside characteristics. It better captures "bad" volatility.
Calmar Ratio
Formula: Annualized Return / |Max Drawdown|
Compares returns to worst-case drawdown. Higher is better - means good returns relative to maximum pain experienced.
<1.0
Weak
1.0-3.0
Good
>3.0
Excellent
Trading Activity Metrics
Win Rate (Daily) (%)
Formula: (Profitable Days / Total Days) × 100
Percentage of days with positive returns. Note: This is NOT the same as trade win rate - it measures daily profitability consistency.
Interpretation: 50-55% is typical for good strategies. Much higher (>70%) might indicate over-fitting. Much lower (<45%) suggests inconsistent performance.
Number of Days
Total days in the backtest period. More days = more statistically significant results.
- Minimum: 60 days (~2 months) for initial testing
- Recommended: 180+ days (6 months) for reliable metrics
- Ideal: 365+ days (1 year) to capture different market conditions
Comparing Strategies
Use these metrics to objectively compare different strategies:
Example Comparison
| Metric | Strategy A | Strategy B | Winner |
|---|---|---|---|
| Total Return | 87% | 52% | Strategy A |
| Max Drawdown | -38% | -18% | Strategy B |
| Sharpe Ratio | 1.2 | 1.8 | Strategy B |
| Volatility | 42% | 24% | Strategy B |
| Overall | Strategy B |
Strategy A has higher returns but Strategy B wins on risk-adjusted metrics. For most traders, Strategy B is the better choice despite lower absolute returns.
Quick Reference Summary
Focus on Returns
- Total Return
- Annualized Return
Focus on Risk
- Max Drawdown
- Volatility
Focus on Risk-Adjusted
- Sharpe Ratio (most important)
- Sortino Ratio
- Calmar Ratio
Focus on Consistency
- Win Rate (Daily)
- Equity curve smoothness
Final Advice: Don't optimize for a single metric. A good strategy balances returns, risk, and consistency. Sharpe ratio >1.5, max drawdown <25%, and smooth equity curve is an excellent target.