Max drawdown, Sharpe ratio and win rate, explained
Max drawdown is the largest fall from a peak to a later low, the Sharpe ratio is average daily return divided by its volatility (scaled to a year), and win rate is the share of trades that made money. Read together with total return, they tell you how a strategy earned what it did and how painful it was to hold.
Updated · The Open Apps, Inc.
Step by step
- Total return. The change in the portfolio's value over the period, after the trading cost. Compare it with the benchmark over the same days.
- Max drawdown. The worst peak-to-trough fall in that period. A portfolio that goes from 10,000 to 12,000 and then to 9,000 has a drawdown of -25% (12,000 to 9,000), whatever happens next.
- Sharpe ratio. Mean daily return over its standard deviation, times the square root of 252. Shadowfolio uses a 0% risk-free rate. Above 1 is commonly read as good; it means little over short periods.
- Volatility. The standard deviation of daily returns, annualised, in percent.
- Win rate and trades. Each round trip from buy to sell is a trade; positions still open count at the last close. A low win rate can still make money if winners are larger than losers.
A made-up example
Two strategies both return +10% in a year. One had a -6% max drawdown and a Sharpe of 1.4; the other fell -22% along the way and has a Sharpe of 0.6. Most people would find the first far easier to stick with, even though the headline return is the same. (These figures are invented to illustrate the point.)
Ways to do it
| Measure | Answers | Watch out for |
|---|---|---|
| Total return | How much did it make? | One lucky trade can dominate |
| Max drawdown | How bad did it get? | Only the single worst episode |
| Sharpe ratio | Return per unit of day-to-day risk | Unstable over a few months |
| Win rate | How often were trades right? | Says nothing about trade size |
| Exposure | How much of the time was money invested? | Low exposure lowers both risk and return |
No single number is enough; that's why Shadowfolio shows them side by side with the benchmark.
Use it in ChatGPT
Add Shadowfolio in ChatGPT (coming soon to the plugin directory), then say:
- Backtest my strategy and explain the max drawdown.
Shadowfolio runs only the rules you describe. It never suggests investments, never gives advice and never places trades.
Questions
- Is a higher Sharpe ratio always better?
- Between two strategies over the same period, usually; across different periods or very short ones, not reliably.
- Why is my drawdown worse than the benchmark's?
- Concentrated positions or few holdings move more than a broad index fund.
- What's exposure?
- The average share of the portfolio held in positions rather than cash or the idle-money fund.