How to read a backtest

Which numbers in a backtest report to trust, which to question, a checklist for spotting unrealistic results, and how to compare a strategy with a benchmark.

Read in this order

  1. The period. Does it include a bear market, such as 2008, 2020 or 2022? A test from 2010 to 2021 flatters almost everything.
  2. Max drawdown. Could you have held on through it?
  3. Benchmark. Did it beat simply holding an index fund, after costs?
  4. CAGR. Only now look at returns.
  5. Risk-adjusted return: Sharpe ratio, Sortino ratio, Calmar ratio.
  6. Turnover and trade count.

Red flags

Sign Why it worries
Sharpe above 2 for years Rare in reality; often Overfitting in investing
Very smooth equity curve Hidden tail risk or look-ahead bias
Most gains from a few days Luck, or one event
Turnover over 400% a year Costs and overfitting risk
Short test period Not enough different markets
Many rules and branches More chances to fit noise

Compare fairly

Use the same dates, include dividends for both, and match risk: a 3x leveraged strategy should be compared with a leveraged benchmark, or judged on risk-adjusted numbers.

The final question

Can you explain in a sentence why this strategy should keep working? If not, treat the backtest as a coincidence until time proves otherwise.

Try it Backtest a Strategy

See also

  • What is backtesting? What backtesting a strategy means, how a backtest is built, the common biases that make backtests look better than reality, and how to use results wisely.
  • Overfitting in investing What overfitting is, why strategies tuned to past data fail in live trading, what a large study of community strategies found, and how to measure it.
  • Maximum drawdown What maximum drawdown is, how to calculate it, why losses need bigger gains to recover, and historical drawdowns for stocks and leveraged funds.
  • Sharpe ratio What the Sharpe ratio measures, how to calculate it from returns and volatility, what counts as a good Sharpe ratio, and where it misleads.

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Last updated September 30, 2026. Education only, not investment advice.