Reading Results Without Fooling Yourself

Goal

Develop the skill of reading a full backtest results report and making an informed go/no-go decision for forward testing.

Mistake This Prevents

Seeing 55% win rate and 1.8 profit factor, deciding the strategy is "good enough," and deploying it live without noticing the maximum drawdown is 35%, which would likely cause you to abandon the strategy during the drawdown.

Core Concepts

The Seven Metrics and What Each Tells You

1. Total Trades

• < 30: Results are statistically unreliable (too few)
• 30–100: Reasonable but low confidence
• 100+: High statistical confidence Guideline: Never deploy based on fewer than 30 trades.

2. Win Rate

• Context-dependent: A 40% win rate with 3:1 average winner is profitable; a 60% win rate with 0.5:1 average winner is not.
• More useful when combined with average winner R.

3. Average Winner (R)

• R = ratio to stop distance. Average winner of 2.0R means winners average 2× the stop distance.
• Target: Average winner R × win rate > Average loser R × loss rate

4. Profit Factor

• The single most useful summary metric
• Acceptable: 1.2–1.5
• Good: 1.5–2.0
• Excellent: 2.0+
• Below 1.2: Strategy barely profitable, and transaction costs and slippage may erase it

5. Maximum Drawdown

• The hardest metric to handle emotionally in live trading
• Ask: "Could I hold through this drawdown in real life without abandoning the strategy?"
• If the answer is no, the strategy is not suitable for you regardless of long-term performance

6. Maximum Consecutive Losses

• Determines your Level 2 and Level 3 risk framework triggers
• If the backtest shows 7 max consecutive losses, your 5-loss Level 3 trigger will fire frequently. Is that sustainable?

7. Sharpe Ratio

• Return relative to volatility. > 1.0 = good risk-adjusted return; > 1.5 = excellent
• Less commonly used for simple crypto strategies but valuable for comparison

The Go/No-Go Decision Proceed to forward testing if ALL of the following:

• Trades ≥ 30
• Profit factor ≥ 1.3
• Max drawdown ≤ 25%
• Positive performance in both bull and bear market phases
• Walk-forward efficiency ≥ 0.5

Checklist

• All seven metrics calculated and recorded
• Go/no-go decision documented with specific metric values
• Maximum drawdown assessed for personal psychological tolerance

Common Mistakes

• Making go/no-go based on win rate alone
• Not assessing max drawdown against your own psychological tolerance
• Not checking performance across market phases

Fedha Tool Tie-in

FedhaAcademy's results report displays all seven metrics with colour-coded thresholds (green/yellow/red) and an automatic Go/No-Go recommendation with the specific failing criteria highlighted.