Week 7: Evaluate the Backtest
Profit is only one measurement. You also need to understand how that profit was produced and the risk required to achieve it.
Review these metrics
- Net profit — result after estimated costs
- Maximum drawdown — largest fall from an earlier equity peak
- Win rate — percentage of profitable trades
- Average win / average loss — the size of typical outcomes
- Profit factor — gross profit divided by gross loss
- Expectancy — average expected outcome per trade
- Consecutive losses — capital and emotional pressure
- Number of trades — the size of the statistical sample
Expectancy example
Expectancy = (Win rate × Average win) − (Loss rate × Average loss)
With a 45% win rate, ₹1,500 average win and ₹800 average loss:
(0.45 × 1,500) − (0.55 × 800) = ₹235 per trade
The estimated expectancy is ₹235 per trade — before checking whether all relevant costs were included.
Do not select a strategy only because it generated the highest historical return. A more stable strategy with controlled drawdown is often more practical than a high-return system with extreme fluctuations.
Week 7 outcome
You should be able to assess a strategy using risk, consistency and sample size — not only its total return.
This lesson is for educational purposes only. It is not investment advice, a recommendation or an assurance of returns. Trading and derivatives involve substantial risk, and backtested or paper-trading results do not guarantee future performance.
