Help me understand Sharpe's ratio

Hi, I am trying to understand Sharpe's ratio and how to implement it in Forex, but am not getting anywhere with my understanding of how to work it out.

What in need to know is how to work out what my

 

1. Expected portfolio return
2. Risk Free Rate
3. Portfolio standard diveation

Thanks in advance
Ademac

I wrote an essay on this a few months ago. It got buried in one of the other forums, and nobody reads it anymore.



http://www.forexfactory.com/forexfor...ead.php?t=7672

Thanks silverpike
Ademac

Can someone tell me where i am going wrong in my calculations. as i get a Sharpe's Ratio of 23.9
Please remeber this is about me learning how to do it. Yes i know my sample data is only small but these are the actual returns i have archived through forward testing.

Expected portfolio return
I have only 8 trades to base it on 6 Win 2 Lose
100/8 = 12.5
Win % = 12.5 * 6 = 75%
Loss % = 12.5 * 2 = 25%

Average Win per trade = 366
$ risked = 150
Return = 366/150 = 2.44

Average Loss per trade = 150
$ risked = 150
Return = 150/150 = 1

1.58 = (.75 * 2.44) - (.25 * 1)

Risk Free Rate
91 day T-Bill rate = 5%

.05 /52 weeks as i only get roughly one trade a week
= 0.0009615

Portfolio standard diveation
I calculated this in Excel using as per Silverpike's instructions = 0.066074991

Expected portfolio return = 1.58
Risk Free Rate = 0.0009615
Portfolio standard diveation = 0.066074991

(1.58 - 0.0009615) / 0.066074991 = 23.9

All your numbers up to the standard deviation look correct. I want to note that if you have a trading system with a 75% win rate and a 366/150 win/loss ratio, that is a very very good system. Kudos to you.

If there is an error, it is likely in your standard deviation number. You may try to re-read my section on the Std. Dev. calculation, because it can be tricky to get right. Also make sure the right fields in Excel are being used (double check the fields in the worksheet I provided). The Std. Dev. is in percentage points, so make sure P/L is being measured in percent somewhere in your table.

Ken

I have double checked the standard Deviation equations and made some minor changes to the way i was doing the caculations. The new numbers are listed below as percentage points. I didnt change the formular you used to calaculate standard deviation.

<table x:str="" style="border-collapse: collapse; width: 48pt;" border="0" cellpadding="0" cellspacing="0" width="64"><col style="width: 48pt;" width="64"> <tbody><tr><td valign="top">
</td></tr><tr style="height: 12.75pt;" height="17"> <td style="height: 12.75pt; width: 48pt;" x:num="2.5999999999999999E-2" align="right" height="17" width="64">0.026</td> </tr> <tr style="height: 12.75pt;" height="17"> <td style="height: 12.75pt;" x:num="-2.5000000000000001E-2" align="right" height="17">-0.03</td> </tr> <tr style="height: 12.75pt;" height="17"> <td style="height: 12.75pt;" x:num="-2.5000000000000001E-2" align="right" height="17">-0.03</td> </tr> <tr style="height: 12.75pt;" height="17"> <td style="height: 12.75pt;" x:num="5.0000000000000001E-3" align="right" height="17">0.005</td> </tr> <tr style="height: 12.75pt;" height="17"> <td style="height: 12.75pt;" x:num="" align="right" height="17">0.04</td> </tr> <tr style="height: 12.75pt;" height="17"> <td style="height: 12.75pt;" x:num="" align="right" height="17">0.11</td> </tr> <tr style="height: 12.75pt;" height="17"> <td style="height: 12.75pt;" x:num="" align="right" height="17">0.12</td> </tr> <tr style="height: 12.75pt;" height="17"> <td style="height: 12.75pt;" x:num="" align="right" height="17">0.08</td> </tr> <tr style="height: 12.75pt;" height="17"> <td style="height: 12.75pt;" height="17">
</td> </tr> <tr style="height: 12.75pt;" height="17"> <td style="height: 12.75pt;" x:num="5.7016131802449424E-2" x:fmla="=STDEV(A1:A8)" align="right" height="17">0.058701</td> </tr> </tbody></table>
The Equation now reads
(1.58 - 0.0009615) / 0.058701 = 26.9

Thanks for the help Silverpike, I am going to keep trading this method until i have a bigger data set to work with and then check the numbers again to see what values it returns.

Enjoy
Ademac

Ademac, interesting enough question.

Is there no way you can backtest your strategy to gain a larger data set?

My main goal is to learn how to do the Equation as a way of rating methods that i find in exploration of the forex markets. Also i am subrcibe to the idea of "Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for life."

Yes i have a larger data set for the manual back testing of the method I am using, But i am more interested in actual learning how to do the equation at this stage of my learning proccess. Also i dont trust myself to get it 100% acurate when manualy back testing, so i chose to use my actual results with the method.

WOW!! :surprised

Uhh, Ademac, would you mind letting us in on what this great system is?

Thanks

Fred

Please keep in mind that a system can look very profitable in short term but in long term be an absolute loser. Make sure to backtest your system for at least 100 trades and preferably at least 2 years.

Good Luck