“Screw Your Sharpe Ratios”—The Most Misunderstood Metric in Trading
Why dismissing risk metrics as "academic nonsense" is quietly killing your performance.
“There is no point in crunching and examining either Sharpe ratios, Sortino or whatever other ratios…”
— Alex Haywood, Traders of Our Time (Axia Futures)
I've heard this for years: intraday desks dismiss Sharpe as 'academic fluff.'
Newer traders absorb the belief that these tools have no place in "real world" trading—missing the point entirely.
They’re not rejecting the Sharpe ratio because it has flaws.
They're dismissing it because they fundamentally misunderstand what it measures.
They're conflating Sharpe (an efficiency metric evaluated after trades) with lot sizing (a risk decision made before the trade).
Let's set the record straight.
Sharpe Isn’t Perfect—but It Is Useful
Sharpe assumes normal distributions, ignores fat tails, and penalizes upside volatility equally with downside.
For downside focused analysis, use Sortino. But for most traders, Sharpe answers one critical question:
"Did the returns I generated justify all the ups and downs (volatility) my account experienced along the way?"
Sharpe in One Sentence
At its core, Sharpe measures returns per unit of risk, not per unit of time.
Sharpe ratio isn't about restricting your trading size or making you risk averse.
It doesn't care about your holding period—only how efficiently your strategy converted risk (volatility) into returns.
For intraday traders, Sharpe simplifies neatly because the risk free rate (used in traditional formulas) becomes negligible.
The formula you need is simply:
To annualize the Sharpe ratio, we multiply by √252 when using daily returns, as there are 252 trading days per year.
This standardizes performance metrics to an annual timeframe for consistent comparison.
Higher volatility (larger swings) means more uncertainty, stress, and luck involved in your outcomes.
Volatility (σ) sounds technical, but it’s straightforward: it simply measures how far your returns swing around their average.
If your equity curve looks like a roller coaster—sharp ups and downs—that’s high volatility.
If your equity curve steadily grinds upward with smaller swings, that's low volatility.
Sharpe clearly tells you if your strategy’s profit was actually worth the turbulence it caused.
(If the idea "path matters more than profit" resonates, revisit my earlier piece “Why Edge Isn’t Enough,”where identical returns can mask dramatically different risks.)
Ex‑Ante vs Ex‑Post — Two separate jobs, equally essential
Traders routinely confuse two distinct processes.
Here's the clear split you need to understand:
Ex-Ante (Before Trade) Position sizing is a forward looking decision, set before the trade, determining how much capital is risked on each idea.
Ex-Post (After Trade) Sharpe is a backward looking metric, evaluating how efficiently a strategy converted risk (volatility) into return after trades are closed.
This distinction is critical.
The Sharpe ratio does not dictate how big you should trade; it tells you if the risk you took was justified by the returns you achieved.
Conflating the two leads to either reckless overexposure or unnecessary caution.
A Reality Check: Two Traders, Same Sharpe
Consider two traders with an identical Sharpe ratio (~1.4) using an ATR / volatility method stop:
Same efficiency (Sharpe), yet dramatically different profits because their risk budgets differ.
Sharpe doesn't restrict you from trading big—it just ensures the risk you're taking is earning its keep.
Why I Use Sharpe Relentlessly
I choose to use these metrics because:
Scale free: Sharpe, Sortino, and Calmar ratios work universally whether you're trading 1 lot or 1,000 lots
Early warning signs: Declining Sharpe signals edge decay before drawdowns.
Institutional appeal: Quantifies “smoothness” for capital allocators. Institutions want smooth, not roller coaster equity curves.
Your Action Plan
1. Write Your Lot Sizing Rule Before You Trade
We set lot sizes before any randomness occurs:
With a $100k account, risking 0.5% per trade ($500), and unit risk per lot of $125, you trade exactly 4 lots—no guesswork required.
I’m drafting a detailed walkthrough of sizing frameworks (Kelly, ATR, Stop based, etc.). Stay tuned.
2. Run This Simple Calibration Monthly:
Every month, perform a simple calibration:
If Sharpe is below your target → reduce your lot size (your strategy’s efficiency dropped).
Drawdown too deep despite good Sharpe? → tighten entry rules or adjust stops.
Using fractional Kelly? Declining Sharpe = smaller bets.
No complicated processes—just monthly discipline.
Final Word
Lot counts keep you alive today; Sharpe tells you if living this way makes sense tomorrow. Ignore either and the market decides for you.
Field note: This draft prioritises key insights over polish. Customise the numbers to your own style.
What amount of historical data is "enough" to accurately assess a trading strategy’s performance, including its Sharpe Ratio, strengths and weaknesses?
So insightful, thank you so much.