Sharpe and profit factor: which metrics do you judge a strategy by?

FTC Community TeamStaff17 Sept 202620 views

Return alone says nothing. Profit factor shows gross win versus gross loss; Sharpe adjusts returns for volatility; maximum drawdown shows what it cost to earn. Each metric hides something the others reveal.

Sharpe and profit factor: which metrics do you judge a strategy by? — risk-reward diagram — A risk-reward ratio of 1 to 2

Which do you use?

the metrics you track for your own trading
the threshold a strategy must clear
the metric that fooled you once

Sharpe and profit factor: which metrics do you judge a strategy by? — drawdown and recovery diagram — An equity curve during a drawdown and its recovery

The expectancy guide defines the core set.

Background: Drawdown and recovery: why a 50% loss needs a 100% gain

Losses and gains aren't symmetrical. See how much you need to recover from a drawdown, what losing streaks do at different risk levels and how to set limits.

How much do you need to gain to recover from a 50% loss?

100%. The gain needed is the loss divided by one minus the loss, so larger drawdowns need disproportionately larger gains.

What is maximum drawdown?

The largest fall in account value from a peak to a later low, before a new peak is reached, usually expressed as a percentage.

Read the full guide

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