Sharpe Ratio
A risk-adjusted return metric that measures excess return per unit of total volatility.
Formula
More Details
What is the Sharpe Ratio?
The Sharpe Ratio, developed by Nobel laureate William Sharpe in 1966, is arguably the most widely used risk-adjusted performance metric in finance. It answers a simple but critical question: how much return are you getting for the risk you're taking?
A high return means nothing if you had to ride a terrifying roller-coaster of drawdowns to get there. The Sharpe Ratio puts both sides of the equation — return and volatility — into a single number.
Formula
Sharpe Ratio = (Mean Daily P&L − Risk-Free Rate) / Standard Deviation of Daily P&L
Where:
- Mean Daily P&L = your average P&L per trading day
- Risk-Free Rate = the return you could earn with zero risk (e.g., Treasury bills, typically ~0 for daily calculations)
- Std Dev of Daily P&L = how much your daily returns fluctuate
Because the risk-free rate on a daily basis is negligibly small, TradesViz simplifies this to:
Sharpe ≈ Mean Daily P&L / Std Dev of Daily P&L
Interpretation
| Sharpe Ratio | Meaning |
|---|---|
| < 0 | Losing money on average — you'd be better off in cash |
| 0 – 0.5 | Marginal — risk is not being well-compensated |
| 0.5 – 1.0 | Acceptable — decent risk-adjusted returns |
| 1.0 – 2.0 | Good — strong returns relative to volatility |
| 2.0 – 3.0 | Excellent — very efficient edge |
| > 3.0 | Outstanding — but verify sample size and regime |
A Practical Example
Trader A makes $500/day on average with $800 daily standard deviation:
- Sharpe = 500 / 800 = 0.63
Trader B makes $200/day on average with $120 daily standard deviation:
- Sharpe = 200 / 120 = 1.67
Trader B earns less in absolute terms but is far more consistent. If both traders sized up proportionally, Trader B's system would scale better and survive black-swan days.
Limitations to Keep in Mind
- Assumes symmetric risk: The Sharpe Ratio penalizes upside volatility equally to downside volatility. A huge winning day actually hurts your Sharpe. If your returns are positively skewed, consider the Sortino Ratio instead.
- Sensitive to sample size: With fewer than 30 trading days, the standard deviation estimate is unreliable.
- Time-period dependent: A strategy can have a great Sharpe in a trending market and a terrible one in a choppy regime.
- Doesn't capture tail risk: Two strategies with identical Sharpe ratios can have vastly different worst-case drawdowns.
How TradesViz Calculates It
TradesViz computes your Sharpe Ratio from your actual realized daily P&L — not from hypothetical returns or model outputs. Daily P&L is grouped by calendar date across all closed trades in the selected account and date range.
This means:
- Commissions and fees are included (if entered)
- Partial fills and multi-leg trades are properly aggregated
- Intraday and multi-day holds are both captured at the daily level
How TradesViz Does It Better
- Per-account and multi-account: Compare Sharpe across separate strategies or brokers
- Filter-aware: Apply tag, setup, or symbol filters and see the Sharpe for just that subset
- Paired with Sortino and Calmar: View all three risk-adjusted ratios side by side for a complete picture
- Rolling analysis: Track how your Sharpe evolves over time to spot strategy decay
Where to find it in TradesViz
Example
A trader averaging $300/day with a $250 daily standard deviation has a Sharpe Ratio of 1.2 — indicating good risk-adjusted performance.