When conducting backtesting, there are several key performance metrics that you should monitor to
evaluate the effectiveness of a trading strategy.
Here are some of the most important measures you
should consider:
CAR (Compound Annual Return): This is the average annual rate of return on your investment over the
entire backtesting period.
Drawdown: This is the maximum percentage loss from the peak value of your investment during the
backtesting period.
This is important to monitor because it can help you manage risk and avoid large
losses.
Win Ratio: This is the number of winning trades divided by the total number of trades.
A high win
ratio is generally considered a positive indicator, but it should be interpreted in the context of
other performance metrics.
Winning Percentage: This is the percentage of winning trades out of the total number of trades.
This
metric is useful for evaluating the effectiveness of your entry and exit strategies.
Sharpe Ratio: This is a measure of risk-adjusted return.
It takes into account the amount of risk
taken to achieve a certain level of return, and is calculated by dividing the difference between the
expected return and the risk-free rate by the standard deviation of the returns.
Sortino Ratio: This is similar to the Sharpe Ratio, but it only considers downside risk (i.e. the
risk of losses).
This metric is useful for evaluating strategies that prioritize risk management.
Maximum Drawdown Duration: This is the length of time it takes for your investment to recover from
its maximum drawdown.
This metric is useful for evaluating the resilience of a trading strategy over
time.
These are just a few of the key metrics that you should monitor when conducting backtesting.
It's
important to consider them in combination with each other to get a more complete picture of the
performance of your trading strategy.
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