Backtesting Statistics Explained

When you backtest a strategy using the Momentum Investing Simulator, you will see a summary of key statistics at the end of the backtesting period.

Here is a breakdown of the backtesting statistics.

Total P&L

This is the total profit or loss recorded at the end of the backtesting period.

Max Drawdown (Max DD)

Max Drawdown is the largest decline from a portfolio’s peak value to its lowest point during the backtesting period. It represents the worst loss an investor would have faced and helps assess risk or volatility. Drawdown is calculated based on realised returns. A lower drawdown indicates better risk control and is generally preferred.

CAGR (Compounded Annual Growth Rate)

Compounded Annual Growth Rate (CAGR) measures the average annual growth of an investment over a specified period, assuming profits are reinvested each year. It reflects how consistently the investment has grown. If the strategy’s CAGR is higher than that of the benchmark index, it indicates outperformance.

Total Trades

The total number of buy/sell transactions during the backtest. Detailed trade data can be exported in an Excel file.

Average Monthly Churn

The average number of trades per month. Lower churn is generally better, though some strategies may justify higher churn if they deliver better returns.

Positive Trades

The percentage of trades that were profitable (positive returns). In momentum investing, typically 45%–50% of trades are profitable.

Average Annual Return

The average of yearly returns over the backtesting period. Higher average returns are better.

Median Annual Return

The middle value of all annual returns when sorted. It gives a more stable view of typical performance by reducing the impact of extreme returns. Higher median returns are better.

Positive Years

The percentage of years where the portfolio ended higher than the previous year’s ending value.

Positive Months

The percentage of months with positive returns during the backtest.

Average Monthly Return

The average return generated each month. Positive average returns are preferable.

Average Positive Year Return

The average return during years when the portfolio showed a gain.

Average Negative Year Return

The average return during years when the portfolio showed a loss.

Sharpe Ratio

The Sharpe Ratio measures how much extra return a strategy generates over the risk-free rate, relative to the total volatility (standard deviation) of returns.

Formula:

Sharpe Ratio = (Average Return – Risk-free Rate) ÷ Standard Deviation of Returns

Risk-free rate of return is considered as 7% in Momentum investing simulator calculations.

Below is a yearly P&L table of a sample strategy for reference.

Example:

Fixed return: 7%

Average annual return: 44.90%

Net excess return: 37.90%

Standard deviation: 42.52%

Sharpe Ratio = 0.89 (37.90% / 42.52%)

A Sharpe Ratio above 0.50 is generally considered good. A higher Sharpe Ratio indicates better risk-adjusted performance.

Sortino Ratio

The Sortino Ratio is a variation of the Sharpe Ratio that focuses only on downside volatility—returns that fall below the risk-free rate. This makes it more relevant for risk-averse investors.

Formula:

Sortino Ratio = (Average Return – Risk-free Rate) ÷ Downside Deviation

Example:

Fixed return: 7%

Average annual return: 44.90%

Net excess return: 37.90%

Downside deviation: 0.08

Sortino Ratio = 4.88 (37.90 / 0.08)

A Sortino ratio of 1 and above is considered good. A higher Sortino Ratio means the strategy generates strong returns while minimizing downside risk—ideal for risk-conscious investors.