Sharpe Ratio
Also known as: Sharpe, risk-adjusted return
The Sharpe ratio is the most widely used measure of risk-adjusted return, calculated as the strategy's excess return over the risk-free rate divided by the standard deviation of its returns; higher is better and the same return at lower volatility produces a higher Sharpe.
Sharpe is the default risk-adjusted yardstick because it answers the question every comparison between strategies has to answer: did the higher return come from more skill or just from more risk? A 20 percent annual return with 30 percent volatility (Sharpe ≈ 0.65) is structurally different from a 12 percent annual return with 6 percent volatility (Sharpe ≈ 2.0). The second strategy is the better trader by every long-run criterion, even though the first looks louder on a screenshot.
Sharpe has well-known limitations: it penalizes upside volatility the same as downside, it assumes returns are roughly normal (they aren't), and it is sensitive to the time period chosen. Traders working with strategies that have a positive skew (rare big winners, many small losers — classic trend-following) often look worse by Sharpe than they actually are. That is why the Sortino ratio and Calmar ratio are useful companions, not replacements.
Useful Sharpe benchmarks for a discretionary trading book: a sustained Sharpe above 1.0 is a respectable edge; above 2.0 is unusual and worth investigating for survivorship; below 0.5 is hard to distinguish from luck given typical sample sizes.
(annualized return − risk-free rate) ÷ annualized standard deviation of returns, computed on closed-trade or daily-equity series.
Reported alongside expectancy and profit factor on the Key Metrics dashboard widget.
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