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When Sharpe is useless

Tuesday, October 25, 2016 6:24
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During development of an intrady strategy I've come across a case where Sharpe ratio (and Sortino too) is a very bad way to benchmark performance. To illustrate this case, imagine a strategy that enters a position and 'brackets' the exit levels with a limit and a stop-loss order. This results in the pnl distribution as shown in the graph:

B4INREMOTE-aHR0cDovLzMuYnAuYmxvZ3Nwb3QuY29tLy1Vd0VNSVBmR2JuZy9UYW5FVEJkVlZYSS9BQUFBQUFBQUREdy9LeDMwMEh0cGNwby9zMzIwL2RlbHRhcy5wbmc=

The position is either closed at the limit or the stop-loss level, but not in between. Because Sharpe is all about normal distribution, it just does does not work for this case. A better solution here is to use win %, especially in the case of symmetric brackets.

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