SERVING THE QUANTITATIVE FINANCE COMMUNITY

 
User avatar
nonlinear5
Topic Author
Posts: 4
Joined: December 12th, 2013, 6:08 pm

Sharpe's Ratio for a trading strategy

December 16th, 2013, 2:32 pm

Hello there,I am trying to calculate the annualized Sharpe's ratio for a trading strategy. Sometimes the strategy does not generate any trades for days and weeks, and sometimes there are multiple trades a day. The thing is, the average duration of a trade is only about 10 minutes. Overall, the strategy is in the market less than 1% of the regular trading session time. The rest of the time, it's flat. The strategy does not hold positions overnight. So, should I use hourly returns, or maybe even 1-minute returns as the basis for the calculations of an annualized Sharpe's ratio? Or should they be average daily returns?Here is my attempt to calculate the annualized Sharpe's ratio. For simplicity sake, I am not using the risk-free rate of return in the Sharpe's ratio.Number of trades: 544Mean trade return: 0.0961 %Standard deviation of all trade returns: 0.2564 %Time period: 4.66 yearsUsing the above, I am calculating the arithmetic sum of all trade returns: 544 * 0.0961 = 52.2784 %Then the average arithmetic daily return is: 52.2784 / (4.66 years * 252 trading days) = 0.0445 %The annualized average return is then: 0.0445 * sqrt(252) = 0.7064Finally, the annualized Sharpe's ratio is: 0.7064 / 0.2564 = 2.75Would the above be the right methodology for calculating an annualized Sharpe's ratio?Thanks in advance for comments.
Last edited by nonlinear5 on December 15th, 2013, 11:00 pm, edited 1 time in total.
 
User avatar
chocolatemoney
Posts: 322
Joined: October 8th, 2008, 6:50 am

Sharpe's Ratio for a trading strategy

December 17th, 2013, 11:29 am

How do you get to your "Standard deviation of all trade returns" exactly ?I think we may have a problem there.
 
User avatar
nonlinear5
Topic Author
Posts: 4
Joined: December 12th, 2013, 6:08 pm

Sharpe's Ratio for a trading strategy

December 17th, 2013, 2:58 pm

QuoteOriginally posted by: chocolatemoneyHow do you get to your "Standard deviation of all trade returns" exactly ?I think we may have a problem there.I simply used the STDEV function in Excel, over the range of all 544 trades.
 
User avatar
chocolatemoney
Posts: 322
Joined: October 8th, 2008, 6:50 am

Sharpe's Ratio for a trading strategy

December 18th, 2013, 7:52 am

QuoteOriginally posted by: nonlinear5QuoteOriginally posted by: chocolatemoneyHow do you get to your "Standard deviation of all trade returns" exactly ?I think we may have a problem there.I simply used the STDEV function in Excel, over the range of all 544 trades.You may have already figured it out but you can not risk-adjust your annualized returns with the std.dev of the trade returns. You have to compare apples with apples.Found this one: http://www.stat.cmu.edu/~abrock/algotrading/page9.html
 
User avatar
nonlinear5
Topic Author
Posts: 4
Joined: December 12th, 2013, 6:08 pm

Sharpe's Ratio for a trading strategy

December 18th, 2013, 10:37 pm

QuoteYou may have already figured it out but you can not risk-adjust your annualized returns with the std.dev of the trade returns. You have to compare apples with apples. Found this one: http://www.stat.cmu.edu/~abrock/algotra ... e9.htmlYes, indeed, I did not use the same time units. Thanks.
ABOUT WILMOTT

PW by JB

Wilmott.com has been "Serving the Quantitative Finance Community" since 2001. Continued...


Twitter LinkedIn Instagram

JOBS BOARD

JOBS BOARD

Looking for a quant job, risk, algo trading,...? Browse jobs here...


GZIP: On