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.