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I would appreciate your help. I'm pressured to show my risk ratios for one product on intraday.
Grumble: I understand the value of injecting high-risk/high-reward projects (such as intraday trading) into diversified portfolios to improve their measures of efficiency, but I don't see how ratios such as Sharpe are relevant to the activities within a portfolio?
Either way, which ratio would you use, and what would you take as a risk-free rate of return on intraday?
One approach would be to annualise the data and compare with Gilt (for the the risk-free rate), but doing so discards the risk that comes from tying up money in a long-run position. What are your thoughts?
I would always use Margin/Equity at any point. The better the return and the lower the ratio, the better it is.
The more cash you have, the better you will handle drawdowns that are brutal at times and lengthy.
Not sure how to measure against risk-free rate in day trading, especially in leveraged investments.
You do have intriguing questions. very nice!
Matt Z
Optimus Futures
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The 'risk-free rate' was motivated by the past when rates were nonzero (and nonnegative). Today, most people just use zero in practice.
Arbitrary ratios are generally useless unless you are comparing against something else that is commonly used in practice. It's up to you what you're looking to compare against. The artemiso ratio of my portfolio is 6.94346792587e-42... you get the point... The Sharpe ratio is convenient because most funds report a Sharpe ratio.
I don't think single trading accounts can be treated like Funds or portfolios, at least not for an algorithm running 24/7 on a single product.
This is my take on how Sharpe might be made applicable: Assume we have an algorithm running on Eurodollar, Cable and Loonie and each product returns $100 per lot per day. Assume also we have a 3 lot limit. We can rearrange our "investments" such as (they don't feel like investments to me, more like exposures..):
The return is $300 for each arrangement, but the Sharpe ratio might change? Probably not.
But we can add a workflow option (not the financial product) to these arrangements that might improve daily performance to achieve more than $300 on average. We could find this option using the Sharpe ratio:
Lets create the workflow option that states we will abandon the use of any lot if its drawdown is greater than $0. We would then anticipate the most diversified arrangement to outperform the simplest ones. We could find the Sharpe ratio for each arrangement and compare the arrangements, which will now perform differently thanks to our workflow option. That difference is measurable using Sharpe ratio. Am I right?
In this example we would probably find that we lose money
