Calculating Sharpe ratio for intraday futures strategy?

[40yotrader]

For short term trading its better to use the modified sharpe ratio.

Just take the daily average return and divide it by the std. dev. of daily returns.

Any number above 1 would be great.

43yotrader

 

[kotika]

I tend to agree with the last post over the previous answers.But, as i have given though to this question, i would like to add.

The Sharpe ratio depends on the timeframe used. If you want to use it to eveluate high-frequency strategies, forget about the textbook formula and think yourself. First of all the risk-free return is irrelevant in evaluating your return, so drop it. Next, your return depends on leverage used, so forget about using the margin requirement as a measure of how much capital was used.

Now that we are thoroughly lost, lets remember what is it that Sharpe ratio is trying to measure: it is a return to variability measure. So compute it per trade, simply as

average return
S = -------------------
stdev of return

Then you are supposed to maximize the ratio by changing the parameters of the model.

What i'm trying to say dont use it to compare completely different strategies in different markets, compare same strategy for different values of parameters.

Obviously a bigger value is better, but i would *not* say if it's less than S < 1 thats too bad. You could make a ton of money with a S= 0.01 strategy. For example, if you computed the daily Sharpe ratio for MSFT in the 1990's you would get something like 0.1. That didnt make MSFT a bad bet did it?

However, the S will affect the choice of position size. For that look up the literature on the Kelly criterion. A small S will force you to make very small bets, which may not cover fixed costs. (depends also on whether the trades are serially uncorrelated)

The small bets issue is very serious by the way, if your optimization tells you to bet on a 1/3 of an SP contract given your capital of say 100K, what are you gonna do? Trade SPY instead???? I suspect some naive people here, inquiring about automated systems possess trading capitals much less than that.

 

[JangoFolly]

Thanks for all the replies on this topic; they were very helpful.


Regards,

 

[qtip]

Great post..

I am also trying to learn to calculate the sharpe ratio of my performance over the last 18 months. I have read much about calculating it, however I am still having problems. I do apologize for my ignorance. I think I understand the calculation, but I am not sure how to find the standard deviation...? I do I choose this variable on my own or is there a "standard" number to choose?

thanks!

Quote from steve46:

Hello:

Interesting that no one responded to this simple question. Seems to say a lot about the education and skill level of the crowd here at ET. I'm not going to say that they are a bunch of idiots, but the thought does cross my mind.

First, you need to understand that Sharpe ratio measures the return IN EXCESS of a guaranteed investment, relative to its risk. In theory you can use any guaranteed investment, but actually you should be using something like the return on the 90 day T-Bill.

If you want to calculate a Sharpe ratio of your trading program. Simply take the return for some period of trading, and divide that portion of the return in excess of the 90 day T bill, by the standard deviation of those returns. Now that I think about it, you may want to annualize your returns to make it easier to calc.

As an example, if your trading produced an annualized return of 25%, with a standard deviation of 10%, while at the same time 90 day T-Bills returned 5%, your trading program would have a Sharpe Ratio of 2.


25% minus 5% divided by 10% = 2.0


The higher the ratio, the better the return per unit of risk


Edit:

On second thought, I just read some bullshit comments from people who can't seem to get the message that education and hard work are important to trading success. Now that I think about it, they are (with some exceptions) frigging idiots.

Steve

 

[5yrtrader]

Quote from qtip:

Great post..

I am also trying to learn to calculate the sharpe ratio of my performance over the last 18 months. I have read much about calculating it, however I am still having problems. I do apologize for my ignorance. I think I understand the calculation, but I am not sure how to find the standard deviation...? I do I choose this variable on my own or is there a "standard" number to choose?

thanks!

1.) Enter in your monthly returns into an excel spreadsheet.

2.) Use excel's standard deviation formula to find the monthly standard deviation and multiply that number by the square root of 12, giving you your average yearly standard deviation.

3.) take the average of your monthly returns and multiply this number by 12, giving you your average yearly return.

4.) Subtract the risk free rate from this number.

5.) Divide your answer from #4 by your answer from #2 and get your sharpe ratio

 

[5yrtrader]

Oh and f_ck you steve46, you think your better than me?

 

[TheStudent]

1) Have the daily NAV of your account handy. Note, there should be three columns for each day : i) beginning NAV, ii) ending NAV, iii) withdrawal/addition of capital

The last column iii) is so that when you add/withdraw money to your account, it doesn't show up as a profit/loss

Each day's beginning NAV is the previous day's ending NAV + net capital withdrawal/addition

2){ Ending NAV / Beginning NAV - 1 }for each day will give you the % return on capital for each trading day.

3) Find the mean and the standard deviation for the series of % returns.

4) Now calculate {1 + Federal Funds rate}^{1/252} - 1. This will give you the daily compounded overnight risk free rate. (You could get fancier and more accurate, but it involves more work and it is rare that the additional accuracy would be worth the bother)


5) Take the square root of 252 and multiply it by {mean less the daily overnight risk free rate}. Divide this product by the standard deviation.

6) You have your Sharpe Ratio!

Those trading futures and who are not earning any overnight interest on account of not buying Tbills or having too small a balance can skip the whole overnight risk free rate exercise (ie assume it's zero).

I just did mine and it's 1.13 .... even in the midst of a big fat drawdown.

 

[acdtrader]

Here is information pertaining to calculating Intraday strategy

The pseudocode is in C#

Stats dailyStats = new Stats(dailyReturns.Values.ToList());



double meanReturnAnnualized = dailyStats.MeanX * TradingDaysYear;



double stdDevAnnualized = dailyStats.StdDevX * Math.Sqrt(TradingDaysYear);



// sharpe = mean daily rtn * 252 / (stdev(daily rtn) * sqrt(252))

SharpeRatio = meanReturnAnnualized / stdDevAnnualized;