A strong per-trade edge over 250 trades: annual Sharpe?

Question

A strategy earns an average of 0.8% per trade, with a standard deviation of 4.0% across trades, and it makes 250 independent trades per year. What annualized Sharpe ratio does this imply?

Accepted Answer

Build annual from per-trade. Over M independent trades, the annual Sharpe is the per-trade Sharpe times the square root of trades per year: SR{	ext{annual}} = \frac{m}{s}\sqrt{M} = s{	ext{trade}}\sqrt{M}. Plug in the numbers. The per-trade Sharpe is s{	ext{trade}} = 0.8\%/4.0\% = 0.20, and M = 250: SR{	ext{annual}} = 0.20 	imes \sqrt{250} = 0.20 	imes 15.81 \approx 3.16. Interpretation. A solid per-trade Sharpe of 0.20 combined with 250 trades a year produces a strong annual Sharpe of about 3.16. Both levers are working: the per-trade edge is twice as good as a 0.10 tactic, and 250 trad…

A strong per-trade edge over 250 trades: annual Sharpe?

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