What is sharpe ratio?

What it means

It divides return above the risk-free rate by the standard deviation of returns. The intent is to reward consistency: a strategy returning 15% with small fluctuations scores better than one returning 20% with violent ones.

Why it matters

Its main flaw for trading systems is that it penalises upside volatility identically to downside. A strategy with occasional very large winners is punished for exactly the behaviour that makes it valuable, which is why the Sortino ratio — using only downside deviation — is often preferred.

What this changes in practice

It is also unstable on small samples. Ten trades a month for seven months is roughly seventy observations, which is nowhere near enough for a Sharpe ratio to mean anything. We do not publish one for that reason, and any retail product quoting a precise Sharpe over a short live period is quoting noise.