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I happen to like the Sharpe ratio too. I find that when I
run a bunch of historical backtest simulations and measure
lots of statistics on the resulting equity curves, the curves
my eyeball and my gut like best, seem to correlate with
the highest Sharpe ratio. I've tried the standard set of
candidates: Kestner K-Ratio, Sortino Ratio, Schwager Return
Retracement Ratio, Seykota Lake Ratio, Spratling R-Squared,
Curtis Faith R-Cubed, MAR ratio, Peter Martin Ulcer Index,
Wealth Lab WL Score, ad nauseum. But the equity curves
I like, and the equity curves Sharpe Ratio likes (biggest
ratio), are a better match than with any other metric.
However I would like to remind folks that to calculate a
Sharpe Ratio, you need a time series of returns. A list
of trade outcomes is insufficient; you don't know the
*timing* of those outcomes. Different trades have different
durations, and because we trade *portfolios* of instruments,
many trades overlap one another. For example, here are
the positions in one of my personal accounts, as of Friday.
(I'll be adding another one on Sunday night, as I just got
an entry signal for LIFFE White Sugar #5). There are 29
different positions, nine of which got entered on a split
fill and/or pyramid. See Bean Oil and Corn for two
examples.
These 29 trades, soon to be 30 trades, proceed in parallel.
The daily returns of these positions add together to form
the daily return of the portfolio as a whole. We can't
know the portfolio return (thus we can't calculate a Sharpe
Ratio) without knowing the *timing* of the individual trades.
In fact, the easiest and in my opinion best way to
calculate the Sharpe Ratio, is to begin with the equity
curve itself.
But you knew that already. This is merely a reminder.
- MJ
Sym EntryDate L/S ncars Month EntryPrice
AD 20071210 L xxx Mar 0.87265
BO 20071224 L xxx Mar 47.68
BO 20071224 L xxx Mar 47.66
C 20071126 L xxx Mar 409.00
C 20071226 L xxx Mar 452.5
CC 20071109 L xxx Mar 1951.0
CD 20071210 L xxx Mar 0.99645
CD 20071210 L xxx Mar 0.9964
CGB 20071123 L xxx Mar 115.21
CGB 20071204 L xxx Mar 116.03
CU 20071210 L xxx Mar 1.4669
DA 20071126 L xxx Mar 16.92
DA 20071126 L xxx Mar 16.90
DX 20071206 S xxx Mar 76.50
EBM 20071126 L xxx Mar 109.50
ED 20071107 L xxx Jun 95.79
ED 20071126 L xxx Jun 96.16
FC 20071210 S xxx Jan 105.85
FF 20071001 L xxx Mar 95.73
FF 20071001 L xxx Mar 95.725
FSS 20071022 L xxx Jun 94.40
FV 20071123 L xxx Mar 109^23.5
GC 20071123 L xxx Feb 820.5
KW 20071123 L xxx Mar 845.5
LC 20071207 S xxx Feb 96.175
LCC 20071228 L xxx Mar 1056.0
LH 20071128 S xxx Feb 62.15
MP 20071210 L xxx Mar 0.091775
O 20071220 L xxx Mar 302.0
PL 20071221 L xxx Apr 1527.8
S 20071224 L xxx Mar 1193.50
SB 20071228 L xxx Mar 11.06
SJB 20071205 L xxx Mar 137.28
SJB 20071205 L xxx Mar 137.26
SM 20071224 L xxx Mar 335.00
SM 20071224 L xxx Mar 335.25
TU 20071123 L xxx Mar 105^03.5
TY 20071123 L xxx Mar 112^23.75
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