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Metrics Glossary ​

Formal definitions for every statistic reported after a MarketHeist backtest. All metrics are computed on the strategy's daily (or bar-frequency) return series unless otherwise noted.

Sharpe Ratio ​

Definition: Annualized excess return divided by annualized volatility of returns.

Sharpe = (μ_strategy - μ_rf) / σ_strategy × √N

Where:

  • μ_strategy = mean daily return of the strategy
  • μ_rf = daily risk-free rate (assumed 0% in MarketHeist)
  • σ_strategy = standard deviation of daily strategy returns
  • N = trading days per year (252 for daily; 52 for weekly; 12 for monthly)

Interpretation: Risk-adjusted return per unit of total (upside + downside) volatility. Higher is better. See Metrics for interpretation ranges.

Sortino Ratio ​

Definition: Like Sharpe, but uses only downside volatility (standard deviation of negative returns).

Sortino = (μ_strategy - μ_rf) / σ_downside × √N

Where σ_downside = standard deviation of daily returns that are strictly negative (upside volatility ignored).

Interpretation: More appropriate than Sharpe for asymmetric strategies where large upside moves are desirable. A Sortino ratio above 1.5 is generally considered strong.

CAGR (Compound Annual Growth Rate) ​

Definition: Annualized geometric return over the full backtest period.

CAGR = (Final portfolio value / Initial portfolio value)^(1/T) - 1

Where T = number of years in the backtest period (fractional years allowed).

Interpretation: The constant annual return rate that would produce the same terminal value. A strategy with CAGR of 12% would double in value roughly every 6 years.

Max Drawdown (MDD) ​

Definition: The maximum peak-to-trough decline in the equity curve, measured from any historical peak to any subsequent trough before a new peak is set.

MDD = max over all t of [ (Peak(0→t) - Trough(t→T)) / Peak(0→t) ]

Interpretation: The largest percentage loss an investor would have sustained if they had entered at the worst possible time. Expressed as a negative percentage (e.g., -35%). A lower absolute value is better.

Calmar Ratio ​

Definition: CAGR divided by the absolute value of Max Drawdown.

Calmar = CAGR / |MDD|

Interpretation: Return per unit of worst-case drawdown. A Calmar above 0.5 is generally acceptable; above 1.0 is strong. Unlike Sharpe, Calmar focuses on the worst-case scenario rather than average volatility.

Omega Ratio ​

Definition: The probability-weighted ratio of gains to losses above a threshold return level L (typically 0%).

Omega(L) = ∫[L,∞] (1 - F(r)) dr  /  ∫[-∞,L] F(r) dr

Where F(r) is the cumulative distribution function of returns.

In practice, computed as:

Omega = Sum of (returns - L) when positive / Sum of (L - returns) when negative

Interpretation: Values above 1.0 mean the strategy produces more probability-weighted gain than loss relative to the threshold. Unlike Sharpe, Omega captures all moments of the return distribution (skew, kurtosis, fat tails).

Profit Factor ​

Definition: Sum of all positive daily return values divided by the absolute sum of all negative daily return values.

Profit Factor = Σ max(r_t, 0) / Σ max(-r_t, 0)

Interpretation: How many dollars the strategy wins per dollar it loses, across all bars. A profit factor of 1.5 means the strategy earns $1.50 for every $1.00 lost. Values above 1.0 are net-profitable; below 1.0 are net-losing.

Recovery Factor ​

Definition: Total net profit over the backtest period divided by the absolute value of Maximum Drawdown.

Recovery Factor = Total Net Return / |MDD|

Interpretation: How many times over the strategy "paid back" its worst drawdown through accumulated profits. A recovery factor below 1.0 means the strategy has not yet recovered from its worst loss within the tested period.

% Invested ​

Definition: Percentage of total bars (trading days, weeks, or months) during which the strategy held a long position.

% Invested = (Bars with long signal / Total bars) × 100

Interpretation: A high % invested (close to 100%) means the strategy behaves similarly to buy-and-hold. A low % invested means the strategy spends significant time in cash, reducing compounding but also limiting drawdowns.

Annualized Volatility ​

Definition: Standard deviation of daily returns, annualized.

Ann. Volatility = σ_daily × √N

Where N = 252 (daily), 52 (weekly), or 12 (monthly).

Interpretation: The annualized "wobble" of the strategy. The S&P 500 has historically shown ~15–20% annualized volatility. Lower volatility with similar returns implies higher Sharpe.

Total Return ​

Definition: Cumulative percentage gain or loss over the full backtest period.

Total Return = (Final value / Initial value - 1) × 100

Unlike CAGR, Total Return does not normalize for time. A 200% total return over 20 years (CAGR ~5.6%) is very different from 200% over 5 years (CAGR ~24.6%).

Win Rate ​

Definition: Percentage of trading bars (days the strategy is long) that ended with a positive return.

Win Rate = (Profitable long bars / Total long bars) × 100

Note: Win rate in isolation is not a reliable quality indicator. A strategy can have a 40% win rate and still be highly profitable if wins are much larger than losses (high profit factor).

Further reading ​

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