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Performance metrics

Sharpe ratio

The trading Sharpe ratio is your average return divided by the volatility of those returns — risk-adjusted performance that punishes a jagged equity curve.

Sharpe ratio = (mean trade return − risk-free rate) / standard deviation of trade returns. The risk-free rate is usually small enough to ignore in a daily-trader context.

It penalizes volatile equity curves. Two strategies with the same total return get very different Sharpes if one is a smooth line and the other is a roller coaster. The smoother one wins.

Common rules of thumb: Sharpe above 1.0 is decent, above 2.0 is excellent, above 3.0 is suspect (often overfit or sample-size-dependent). Day traders frequently see Sharpes north of 2.0 on small samples that don't survive longer windows.

Sharpe assumes returns are normally distributed. Trading returns aren't — they're fat-tailed. Sortino ratio uses only downside volatility and is generally more honest for skewed return profiles.

Not financial advice. This page describes a commonly-used trading concept for educational purposes. It is not a recommendation, does not predict performance, and is not personalized advice. Past performance does not guarantee future results.