Sharpe Ratio

The original Sharpe Ratio (SR) was authored by William Forsyth Sharpe; it is given here with a correction done in 1994. It is designed to evaluate how well an investor is compensated for the risk taken. The higher the SR the better the instrument’s performance. The main ingredients are current price and a prior price which are adjusted with the user defined safe return. An average and standard deviation are taken; and the SR is their quotient. The user must select linear bars but may change the input (close), period length and a safe value. This indicator’s definition is further expressed in the condensed code given in the calculation below.

See also Sharpe Ratio

Sharpe Ratio

How To Trade Using the Sharpe Ratio

The Sharpe Ratio may be used to evaluate a instrument’s performance. No trading signals are calculated.

How To Access in MotiveWave

Go to the top menu, choose Study>Performance>Sharpe Ratio




//input = price, user defined, default is close
//period = p1, user defined, default is 30
//safe = safe return percentage, user defined, default is 2
//av = average, pow = power, index = current bar number
//sma = simple moving average, sdDev = standard deviation

safe = safe / 100; //convert from percent to decimal
BarSize bar = getBarSize();
if (bar.getType() == BarSizeType.LINEAR) barMin = bar.getInterval();
else return;
minPerYr = 60*24*30*12;
barsPerYr = minPerYr/barMin;
adjSafe = Math.pow((1 + (safe)), p1/barsPerYr) - 1; //safe return per period compounded
priorP = price[index-p1];
ret = ((price/priorP)-1) - adjSafe; //safe return subtracted here to reflect Sharpe 1994 revision
av = sma(index, p1, RET);
std = sdDev(index, p1, RET)[0];
Plot: sharpe = av/std;