Sharpe Ratio

The Sharpe Ratio measures the risk-adjusted return of a trading strategy or portfolio. It is calculated as the excess return (above the risk-free rate) divided by the standard deviation of returns. A higher Sharpe Ratio indicates better return per unit of risk. Values above 1.0 are generally considered good, above 2.0 excellent, and above 3.0 outstanding.

How the Sharpe Ratio Is Used in Trading

The Sharpe Ratio is the standard metric for comparing trading strategies. A strategy returning 30% annually with 20% volatility (Sharpe of 1.5) is objectively better on a risk-adjusted basis than one returning 50% with 50% volatility (Sharpe of 1.0), even though the absolute return is lower.

Professional fund managers use Sharpe Ratio for capital allocation. Strategies with higher Sharpe Ratios receive larger capital allocations because they deliver more consistent returns. A portfolio of strategies with individual Sharpe Ratios of 1.0 can achieve a combined Sharpe above 2.0 through diversification.

During backtesting, Sharpe Ratio helps detect overfitting. If parameter changes dramatically affect the Sharpe Ratio, the strategy is likely overfit. Robust strategies maintain stable Sharpe Ratios across a range of parameter values and market conditions.

Access via API

Fetch one year of daily data to calculate annualized Sharpe Ratio for your strategies.