Batting Average and Sharpe Ratio

What’s a good Sharpe ratio? As we already know, such questions do not have easy answers. Some traders will raise some number here such as 2.2 or 3.1 or 1.8. These numbers could be excellent ratios. However, a Sharpe of 1.0 can also be excellent. This depends on a completely different component, the average of hits and batting. This is the percentage of trades that are profitable. As with trading in general, there are compromises. It’s easy to have a high Sharpe ratio when it’s at the expense of the batting average. This happens when large or wide targets are selected, but the quality of the trades is so low that only a small percentage rate reaches these targets. But it can also happen the other way round, that you have a high batting average, which is at the expense of a small Sharpe ratio.

Most traders struggle with the second point. The reason for this is that most traders are afraid to give back an already made book profit. The trader usually feels good with it because he is ‘right’ with a lot of trades, but they always seem to stay on BreakEven.

A Sharpe ratio doesn’t seem to impress, but a scalper who is right with 65% of his trades will make good money with this number. As the time frame gets higher, the Sharpe ratio tends to go up and the batting average tends to go down. Some EOD traders are very successful with a 40% average hit because they reach a 3, 4 or 5 Sharpe ratio. Many intraday traders find it difficult to achieve more than a Sharpe Ratio of 1, but they manage to get more than half of the trades right.

The answer whether Sharpe Ratio or Batting Average will vary with your trading style and will ideally combine a high Sharpe Ratio with a high Batting Average.  It makes sense to draw a graph of the Sharpe ratio and the batting average as these are reciprocal numbers. The higher the combination of these two numbers, the better your trading results will be.

Here again trade analysis is a very important issue. You may make money, but as long as these results are based on a few internal statistics, these profits can be very short-lived.

Between 2000 and 2007, many swing traders made good results with very few statistics because they were carried by the bull market. All the bull market then ended sharply these traders had a hard time in the markets because they had no idea of your trades and their statistics.
The same could be said for the period 2008 – 2018 – but if it comes to a crash scenario like 2007, for many traders there will be a lack of understanding how to react, because for 10 years it went only in one direction and nothing could be done wrong.

The setup types, profit-risk ratio, batting average, Sharpe ratio should be reflected in your trading plan. The more material you have in your trading plan and you can compare your results, the more chances you have to become and stay a better trader.

… where we finally ending up at a complete und sustainable reported TradingJournal again which is automatically maintained.

Disclaimer:

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. Hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. All information on this website is for educational purposes only and is not intended to provide financial advice. Any statements about profits or income, expressed or implied, does not represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. You accept full responsibilities for your actions, trades, profit or loss, and agree to hold this information harmless in any and all ways.

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