A sharpe ratio is a measure of a trader's performance and allows one to objectively compare returns across traders and strategies. You can read about sharpe ratio in more detail here, but in layman's terms, a sharpe ratio measures the risk-adjusted returns of a trader or strategy. In other words, it estimates expected returns, given a unit of volatility. High average returns, but with a higher variance of those returns, is worse than the same high average returns with a lower variance.
While the official definition of sharpe subtracts the risk-free rate from returns, in practice we can forgo this step. Also, in practice, sharpe is usually calculated from daily returns and annualized.
For EMX, we will calculate sharpe using PNL from 5 minute periods and then annualizing that value:
Sharpe = (average(r) / standard_deviation(r) ) * sqrt(12 * 24 * 365)
r = [r_1, r_2, ... , r_n]
- r is the series of 5 minute returns
- EMX only includes non-zero returns in its calculations, and needs at least 4 periods of non-zero returns to calculate a value, otherwise it will return NA
and sqrt(12 * 24 * 365) is the annualizing factor.