Sharpe Ratio
Return per unit of total risk — how much reward you earn for each unit of volatility taken. Higher is better.
Formula
Sharpe Ratio = (Strategy Return − Risk-Free Rate) / Std Dev of Returns
The Sharpe Ratio measures risk-adjusted performance by dividing excess return (return above the risk-free rate) by the standard deviation of returns. It is the most widely cited single performance metric for trading strategies and funds.
A Sharpe above 1.0 is generally considered acceptable; above 2.0 is strong; above 3.0 is exceptional. However, Sharpe penalises upside volatility as much as downside — enter the Sortino Ratio for a more nuanced view.
Example
Strategy returns 18% annually, risk-free rate 4%, standard deviation 10%. Sharpe = (18% − 4%) / 10% = 1.4. Solid risk-adjusted performance.
Related Terms
Calmar Ratio
A risk-adjusted return measure dividing annualized return by maximum drawdown, rewarding strategies that grow without deep equity dips.
IntermediateEquity Curve
A chart plotting account balance over time across all trades, showing the overall trajectory and drawdown periods of a trading strategy.
BeginnerExpectancy
The average dollar amount you expect to make per dollar risked, calculated from your win rate and average win/loss sizes.
IntermediateMaximum Drawdown
The largest peak-to-trough equity decline recorded over a strategy's full history — the worst-case loss an investor would have experienced.
IntermediateProfit Factor
Gross winning trades divided by gross losing trades. A profit factor above 1.5 indicates a reliable positive edge.
BeginnerSortino Ratio
A Sharpe variant that divides excess return only by downside deviation, ignoring upside volatility as a "risk".
AdvancedValue at Risk (VaR)
The maximum loss not expected to be exceeded over a given time horizon at a chosen confidence level, e.g. 95% or 99%.
Advanced