Sharpe Ratio - Highest in myfxbook

I was recently asked by an investor what was Raiden's Sharpe Ratio. They were only looking at systems with those greater than 1.8.

As of 2012-02-19, Raiden's Sharpe Ratio is:
Raiden_Alpari PAMM4_Medium Risk - 0.63
Raiden_Alpari PAMM5_Medium Risk - 0.57

Needless to say, being 1/3 their requirement, they were not interested.

This got me thinking and I went to scan other accounts to get a idea of what a 1.8 SR account looks like. Lo and behold, I find that the Raiden PAMM accounts are amongst the highest SR's in myfxbook, and of the accounts that are active and not in extended drawdowns, they ARE the highest.

I then thought perhaps myfxbook's calculation of the SR was off. And I promptly calculated it myself, using the Daily 10-Year Treasury Yields to get the daily excess return, and got close to the same results.

Basically, none of us would have qualified for their investment. Food for thought.

I had the same deal where I just couldn't figure out why my SR was so low. I guess it's right though - I am just frought with risk, haha. As I see it, when a person is dealing with such low sums of money like most of us here, it's okay to gear for a little agressive growth. I write this knowing that a lot of the accounts here are a-b-s-ol-u-t-l-e-y bananas like that...uff.

anyways, I only found two accounts with higher SR's than yours, one more shady than the other perhaps, but still

https://www.myfxbook.com/members/asttrader/universal-manage1/136133

https://www.myfxbook.com/members/kerryzhenyu/synthetics-high-yield-saving/97275

I don't know what it is all about but had a look to our signal account ...
Sharpe Ratio: 0.24
even with our older stats included...testing the beast 'Million Dollar Pips' EA.. we have 0.07

https://www.myfxbook.com/members/FxProfiler/fxprofiler-systems/241381

hope that helps
😄

Some further observations:

1. The Sharpe Ratio is claimed to be used more as a performance comparator rather than as a standalone risk indicator. In fact, it does not measure risk at all. But even as a standard measure across portfolios/accounts, we would be committing a logic fallacy. I elaborate after the next point.

2. The nature of using standard deviation anywhere in its calculation implies a conformity to normal distribution, which is not the case in account performance. A martingale system with consistent gains, but with no stoploss, will have a large Sharpe Ratio, even though it is exposed to complete destruction every time it trades. A profitable system like the Turtle trading system (multiple small losses, with big and infrequent large gains) will have a tiny Sharpe Ratio compared to a system with consistent but small gains.

3. Using the Sharpe Ratio to compare systems is like trying to determine which swims better, a spoon or a mountain? It is simply not a significant qualifier.

4. Okay, now we look at the mathematics, to get a Sharpe Ratio greater than 1, you would need an average of the returns to be greater than the standard deviation of the returns.
You would achieve a small standard deviation if the absolute $ returns per period is similar, resulting in a large Sharpe Ratio.

This is achievable if each trade/period yields the same $ amount regardless of the growth or loss in the balance(via organic P&L or deposit/withdrawals).
This is silly because it means the system does not increase or decrease the trade sizes in accordance with the balance of the account, i.e. zero money management, and yet it has a large Sharpe Ratio AND lower % yield.
This is illustrated by comparing 'Fixed $10 Return' and '10% growth/Period' tables. The SR for 'Fixed $10 Return' is a whopping 316.54 with net profit of 100%, while the SR for '10% growth/Period' is 3.49 while it's net profit is greater at 159%.



Comparing 'Fixed $10 Return' and 'Fixed $1 Return', they both have the same Sharpe Ratio, when the former has 10 times more profit.
Comparing '10% growth/Period' and '1% growth/Period', the former has 15.9 times more profit but the SR is 3.49, while the latter has a higher SR at 33.20.
Comparing 'Irregular Return' and the rest, it has the second smallest SR 0.60, but the highest net profit at 938%.
Comparing 'Turtle-like Return and '1% growth/Period', the former's SR 0.15 is but a fraction of the latter's SR 316.54, but it has 5.1 times the profit.

5. Also, the longer an account is open, the lower the Sharpe Ratio will go simply because the probability of different returns for each period increases.

All said, why is a statistical measure for particle physics being used to measure fund performance? It's so absolutely ridiculous.

Brilliant! The last sentence is the kicker, so true. Maybe we could incorporate some molecular biology into trading somehow...I know some of the postulates from my parasitology class could certainly be fulfilled.

   Clash posted:
   I had the same deal where I just couldn't figure out why my SR was so low. I guess it's right though - I am just frought with risk, haha. As I see it, when a person is dealing with such low sums of money like most of us here, it's okay to gear for a little agressive growth. I write this knowing that a lot of the accounts here are a-b-s-ol-u-t-l-e-y bananas like that...uff.

anyways, I only found two accounts with higher SR's than yours, one more shady than the other perhaps, but still

https://www.myfxbook.com/members/asttrader/universal-manage1/136133

https://www.myfxbook.com/members/kerryzhenyu/synthetics-high-yield-saving/97275

These accounts illustrate my points above.
(To the owners, I mean no offense when I comment on your account's performance, I only highlight them in relation to the Sharpe Ratio analysis)

https://www.myfxbook.com/members/asttrader/universal-manage1/136133
SR 0.77
This account has been in an extended drawdown since 2011-11-10, with the equity P&L being ($1288.24-$1178.96)/1178.96 = 9.27%, after 7 months.

https://www.myfxbook.com/members/kerryzhenyu/synthetics-high-yield-saving/97275
SR 1.29
This account has an absolute gain of 3.15%, after 1 year(since 2011-02-16). It is less than the average of 5.0% inflation in most countries.
-----------------
There are 3 others:

https://www.myfxbook.com/members/RodeoFox/easy-money/213353
SR 1.19, using owner's custom date period; SR 0.03 using all dates
Looking at the custom date, this account traded just shy of 2 months and is closed. Selecting all the dates, we see that the account is blown at -99.85%.

https://www.myfxbook.com/members/miftahul/miftahul-pamm/148512
SR 0.99
This one looks good, however, it hasn't traded since 2011-12-14. His other account has a very large realised DD of -75%.

https://www.myfxbook.com/members/JokerGBP/joker-gbp/193453
SR 0.80
Extended DD since 2012-01-18, currently at -26.05%.
-----------------

All this just illustrates to us that we simply can't use the Sharpe Ratio for anything.
I can easily program a money management system to game the Sharpe Ratio statistic.
If you are a family office, a fund manager, or an investor, please do not set your investment criteria to this completely useless number.

There is an issue with how the Sharpe Ratio is currently calculated, and may render my above statement unwarranted. I want to make this point clear before, or if, any changes occur.

I've contacted myfxbook about this in the past, as there is a problem with SR itself and a bug in the calculation here on myfxbook.

Wikipedia defines Sharpe's Ratio as follows:

'The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability ratio is a measure of the excess return (or risk premium) per unit of deviation in an investment asset or a trading strategy, typically referred to as risk (and is a deviation risk measure), named after William Forsyth Sharpe. '

[....]

'As a guide post, one could substitute in the longer term return of the S&P500 as 10%. Assume the risk-free return is 3.5%. And the average standard deviation of the S&P500 is about 16%. Doing the math, we get that the average, long-term Sharpe ratio of the US market is about 0.4 ((10%-3.5%)/16%). But we should note that if one were to calculate the ratio over, for example, three-year rolling periods, then the Sharpe ratio could vary dramatically.'

And there's the flaw. Sharpe's ratio does not take floating DD into account. And more importantly, the SR only 'works' on normally distributed returns (profits). And very few forex systems can be classified as such. Finally, if you have a very short track record, SR might show absolutely unreliable values as it's independent of track period.

Raidenworks: you state your potential customers demand a SR of at least 1.80. I'd suggest asking them to show you systems with such a ratio.....coz I've never seen one. Also perhaps inform them about the flaws in SR and that other ratios such as Sortino are more useful measures for comparing systems.

Hi San4x,

Sharpe Ratio does take into consideration floating DD, via the NAV at rollover.

I'll be the last person to rush them, but I believe there will be a change in the Sharpe Ratio reported here in the future.

Thought I'd throw in my 2pips worth,

I am in the process of reading 'Way of the Turtle' I have just completed a section in which Curtis Faith talks about the Sharpe Ratio and found this very interesting. I remembered this post and thought I'd come back and reread the comments and maybe make a few.

Although many comments seem to be dancing very close to the real problem with the Sharpe Ratio, In laymen terms it is not possible to use the Sharpe Ratio in the Forex market (even though it's being used).

As most who have posted here may understand but I didn't fully grasp, the Sharpe ratio has to be measured against a 'Risk-FREE Rate OR the Rate of Interest one could get by INVESTING in a Risk-FREE bond such as a T-bill.'

Furthermore, the Sharpe Ratio was designed to compare the performance of Mutual Funds...Clearly not the same as Forex.

Consider reading the book, When Genius Failed by Roger Lowenstein, Shows just what can happen to a High Sharpe Ratio...

There is IMHO no such measure that can be used to evaluate Forex to any 'Risk-Free Rate or Investment'.

Edit:
I thought it wise to point out why I don't believe Sharpe works at least in Forex and when comparing a System or Money Manager. The primary reason is depending on where you live in the world your 'Risk-Free Rate' can vary wildly. In many countries 3 to 6% returns a year are easy to come by relatively Risk-Free, but if the Sharpe Ratio is based on a U.S asset than this skews the results toward a higher number, but less of a gain for someone living in say Australia. I'm not trading Forex for 6% or even 15% per year I'm looking for 20% or more because relative to my situation I can put it in the bank on 3, 6, or 12 month money market and earn 15% per year.


Curtis Faith, recommends using the MAR Ratio, I will not explain how it works as I would like to recommended to Ethan here at myfxbook to use or add this ratio in lieu of the Sharpe Ratio, would like some feed back from users as whether they would rather use the MAR Ratio in stead before sending an email to Ethan.

One difference Curtis points out in his use of the MAR Ratio is he uses 'the maximum drawdown from the peak
day to the trough day without regard to where those days fall during the month.'

So any thoughts on using the MAR in lieu of the Sharpe I would appreciate any feed back.


'It's truly a shame that no matter how diligently one works to better themselves or those around them, expectedly there is an individual who compares Apples to Oranges with the expectation of Grapes.'

Before I go into a critique of the Sharpe Ratio as a measure, I'm compelled to correct some misunderstandings here.

   OnTheEdge posted:

Although many comments seem to be dancing very close to the real problem with the Sharpe Ratio, In laymen terms it is not possible to use the Sharpe Ratio in the Forex market (even though it's being used).

The Sharpe Ratio is simply the average of the risk-adjusted returns divided by their standard deviation.

We'll be referring to Sharpe's own writings on the matter.
https://www.stanford.edu/~wfsharpe/art/sr/sr.htm

It is supposed to allow comparison of the performance of funds, or trading accounts. It's got nothing to do with the instruments the fund may be using.

   OnTheEdge posted:

As most who have posted here may understand but I didn't fully grasp, the Sharpe ratio has to be measured against a 'Risk-FREE Rate OR the Rate of Interest one could get by INVESTING in a Risk-FREE bond such as a T-bill.'

Yes, this is Sharpe's intention, to quote him here:

'Whether measured ex ante or ex post, it is essential that the Sharpe Ratio be computed using the mean and standard deviation of a differential return (or, more broadly, the return on what will be termed a zero investment strategy).'

However, since it is used as a comparator, any common denominator is removable. In this case, the same risk-free rate being applied to all the returns.

   OnTheEdge posted:

Furthermore, the Sharpe Ratio was designed to compare the performance of Mutual Funds...Clearly not the same as Forex.

Again, got nothing to do with the instrument.

   OnTheEdge posted:

Consider reading the book, When Genius Failed by Roger Lowenstein, Shows just what can happen to a High Sharpe Ratio...

It is a performance comparator, it does not measure risk. It is little wonder that a high Sharpe Ratio fund can blow up.

   OnTheEdge posted:

There is IMHO no such measure that can be used to evaluate Forex to any 'Risk-Free Rate or Investment'.

Edit:
I thought it wise to point out why I don't believe Sharpe works at least in Forex and when comparing a System or Money Manager. The primary reason is depending on where you live in the world your 'Risk-Free Rate' can vary wildly. In many countries 3 to 6% returns a year are easy to come by relatively Risk-Free, but if the Sharpe Ratio is based on a U.S asset than this skews the results toward a higher number, but less of a gain for someone living in say Australia. I'm not trading Forex for 6% or even 15% per year I'm looking for 20% or more because relative to my situation I can put it in the bank on 3, 6, or 12 month money market and earn 15% per year.

Again, it does not matter as long as the same risk-free rate is applied to all the accounts you are comparing.

I wouldn't go into the discussion of 'risk-free-ness' of a T-bill/Government bond as I see there is sufficient fundamental confusion here already, but the take home is that you should look to deduct a rate of return that you otherwise would be fairly certain of getting. E.g. capital-guaranteed cash-deposit interest rate.

But as said above, since you are comparing apples to apples, you can just take out this common denominator that you would be applying across the board.

-------------------
A little elaboration of how Sharpe Ratio is currently being calculated in myfxbook.

The returns are calculated from individual closed trades, and not the NAV of the account at a fixed routine rollover time. Read the entire 'Time Dependence' section in Sharpe's writing. As trades have all different durations, the resultant myfxbook Sharpe Ratio number calculated is something else altogether.

And the issue facing myfxbook is that to calculate the NAV at a fixed rollover is not too straightforward, as MT4 statements are historical records of closed trades only. There will be some issue of back-calculating open trades during the rollover, particularly if there is no lookup of the price at the time. I believe the recent addition of the REXFO pricing might help in this. We'll have to wait and see if it is to be updated or not.
------------------
Ok, now, let's look at the Sharpe Ratio.

You are studying the average of the returns against their standard deviation. (The use of standard deviation to build some significance in the returns of a fund, itself, can be an essay. On its futility. In my opinion, it's really meaningless.) Assuming the fund's returns fall into a normal distribution, to yield a high Sharpe Ratio, you would want to have the average of the returns being higher than their standard dev.

... And this is where I would like another quant to explain the significance to me. So what if it is higher? It doesn't measure risk at all, and the average can be lower than the standard deviation for a much more profitable and stable fund. It's like making the statement that a transport company's trucks are in a deeper shade of blue than its competitor and eluding to its higher business performance.

   Raiden posted:
 So what if it is higher?

   Raiden posted:
Again, got nothing to do with the instrument.

   Raiden posted:
Again, it does not matter as long as the same risk-free rate is applied to all the accounts you are comparing.

It matters if potential clients are using it to measure risk because they 'Believe' it is a measure of risk.

Nevertheless, I offered an option that truly measures risk or at least the past performance of risk, obviously this wasn't acceptable.

'A clients belief in their system to evaluate the risk/reward of potential profits/losses far out weighs factual statistics, regardless, if the system omits/includes irrelevant data.'

To be clear, I am critiquing the Sharpe Ratio, not your contribution to the discussion.

As a doctor, if your patient believes regularly taking arsenic is good for his well-being, would you advise him against doing so? Or just leave him be with his beliefs?


And the MAR Ratio is strongly dependant on accurate records of drawdown, which with the limitations of MT4 statement reporting, all the system owners here can see that their drawdown reported is less than their actual ones.


Take home is that it is not a good idea to reduce the performance of a fund to a bunch of statistics. This was the reason why many financial analysts were caught out during the financial crisis, when their models started failing. The measures used over-simplified things.

You need to go down to the manager and ask him what are his risks settings, methodologies, etc. are.