Measuring Risk-Adjusted Returns
Raw returns don't tell the whole story. Learn how to evaluate your trading performance using sophisticated risk-adjusted metrics.
Key Risk-Adjusted Metrics
Sharpe Ratio
Measures excess return (or risk premium) per unit of risk. Higher values indicate better risk-adjusted performance.
Sortino Ratio
Similar to Sharpe but only penalizes downside volatility. Useful for strategies with non-normal return distributions.
Calmar Ratio
Compares average annual return to maximum drawdown risk. Excellent for evaluating long-term trading performance.
Interpreting Risk-Adjusted Returns
Consider these factors when analyzing risk-adjusted performance:
- Time period and market conditions
- Strategy type and expected behavior
- Benchmark comparison
- Risk tolerance alignment
Practical Applications
Use risk-adjusted metrics to:
- Compare different trading strategies
- Optimize position sizing
- Evaluate strategy modifications
- Set realistic performance goals