Lesson 05: The Metrics That Actually Matter

Trading platforms report about forty performance statistics. Six of them tell you something, and one of the forty — total return, the one every advertisement leads with — tells you almost nothing on its own.

The short list

Everything you need to judge a strategy, in six numbers.

Metric	What it answers	Reasonable
Expectancy in R	What one average trade is worth	Above +0.10R
Trade count	Whether any of this means anything	100 minimum
Maximum drawdown	The worst it got	Under 20%
Return over max drawdown	Reward for the pain	Above 2
Win rate with average R	The shape of the results	Any, if consistent
Longest losing streak	What you have to sit through	Under your tolerance

Five of the six come straight from a journal kept in R, which is the argument for keeping one that way. The sixth — maximum drawdown — needs the equity curve, which your broker's statement provides.

Why these six

Expectancy without trade count is a rumour, so the two travel together.
Drawdown is the constraint, not the return. A strategy you cannot sit through is a strategy you will abandon at the worst moment.
Win rate and average R mean nothing separately — Track 5's lesson 3 showed a 40% method and a 60% method earning identically.
Longest streak is the psychological number. Everything else is arithmetic; this one is what you actually have to live through.

Risk-adjusted comparison

Total return answers "how much" and ignores "at what risk", which is why it cannot be used to compare two strategies.

	Strategy A	Strategy B
Return over the year	+60%	+30%
Maximum drawdown	40%	10%
Return over max drawdown	1.5	3.0
Gain needed to recover the drawdown	66.7%	11.1%

A doubled B's return and is the worse strategy. The last row is why: recovering from A's drawdown takes a 66.7% gain — more than its whole year's return — while B's takes 11.1%. And A's drawdown can be traded at twice the size to match B's risk, at which point its return is comparable to B's with the same 40% hole waiting.

Return over maximum drawdown = total return % / maximum drawdown %

What each variable means:

total return — Over the whole test period, as a percentage
maximum drawdown — The largest peak-to-trough fall, as a percentage

Above 3 is strong for a retail strategy.
2 to 3 is workable.
Below 1 means the drawdown exceeds the annual return, which is very hard to keep trading through.

Try it now

The drawdown calculator turns a losing streak into the recovery it demands. The compounding calculator shows what a given monthly return does over time, which is the honest comparison against the annual number in an advertisement.

Drawdown Calculator Compounding Calculator

Consistency and its measures

Two strategies can return the same amount with entirely different shapes, and the shape determines whether you can actually trade it.

	Strategy C	Strategy D
Annual return	+24%	+24%
Profitable months	9 of 12	3 of 12
Best month	+6%	+31%
Worst month	−4%	−9%
Largest winner's share of profit	8%	62%

D's entire year is one trade. That is not necessarily wrong — some legitimate strategies have exactly this shape — but it means the 24% is a statement about one event, and a year without that event looks completely different.

Share of profit from the largest trade. Above 30% means the result rests on a handful of outcomes. Recompute the expectancy without the top trade, as Track 5 suggested.
Profitable month count, which is a rough consistency read.
Standard deviation of monthly returns — lower is steadier for the same mean.
Number of new equity highs. A curve that makes highs regularly is one you can trade; a curve that makes one in March and none after is a drawdown you are living in.

Note

Consistency is not purely an aesthetic preference. A lumpy strategy demands that you keep executing through long flat stretches, and the failure mode is quitting two trades before the one that pays — which no performance statistic can rescue you from.

Metrics that mislead

Some widely quoted numbers are worse than useless, because they invite a confident wrong conclusion.

Metric	Why it misleads
Total return	Says nothing about the risk taken to get it
Win rate alone	A 90% win rate loses money if the 10% is large enough
Profit factor	Dominated by one or two outsized winners
Best trade	One outcome, presented as a capability
Sharpe ratio on a short sample	Assumes a distribution that returns do not have, and needs years to mean anything
Average monthly return	A mean hiding the drawdown path entirely

The questions behind any advertised figure

Over how many trades? Under 100, stop reading.
What was the drawdown? A return quoted without one is a return quoted without its price.
Was it live or backtested? And if backtested, with what costs?
What did the largest trade contribute? One trade can carry an entire track record.
Over what period, and what was the market doing? A trend-following record from a trending year measures the year.

Apply the same five to your own results before applying them to anybody else's. The purpose of this list is not scepticism about other people's claims; it is that the most persuasive misleading statistics you will ever read are the ones describing your own strategy, because you already want them to be true.

Key takeaways

Six metrics suffice: expectancy in R, trade count, maximum drawdown, return over drawdown, win rate with average R, and longest losing streak.
Compare on return over maximum drawdown — +60% with a 40% drawdown is worse than +30% with a 10% one.
Check what share of profit came from the largest trade; above 30% and the record describes a few events.
Total return, win rate alone, profit factor and short-sample Sharpe all invite confident wrong conclusions — about your own results first.

The Metrics That Actually Matter

By the end of this lesson

Before this lesson