Sharpe Ratio Calculation System Development
Sharpe Ratio is the most common metric of trading strategy quality, measuring return relative to accepted risk.
Formula: Sharpe = (Rp − Rf) / σp
where Rp is portfolio return, Rf is risk-free rate, σp is standard deviation of return.
For cryptocurrency trading, risk-free rate often taken as 0 (or stablecoin staking yield ~5% annual). Result is annualized by multiplying by √252 (trading days) or √365 (for crypto working round-the-clock).
import numpy as np
def calculate_sharpe_ratio(returns, risk_free_rate=0.0, periods_per_year=365):
excess_returns = returns - risk_free_rate / periods_per_year
if excess_returns.std() == 0:
return 0
sharpe = excess_returns.mean() / excess_returns.std()
annualized_sharpe = sharpe * np.sqrt(periods_per_year)
return annualized_sharpe
Interpretation: Sharpe > 1.0 acceptable. > 2.0 good. > 3.0 excellent (often means overfitting in backtesting). < 0 strategy worse than risk-free rate.
System includes calculation of current, rolling 90-day and annual Sharpe with visualization in Grafana dashboard.