Measuring performance: ROI, winrate, Sharpe
Essential Performance Metrics
Quantitative evaluation separates successful traders from gamblers. These three core metrics provide a complete picture of trading performance:
Return on Investment (ROI)
The fundamental measure of profitability. Calculate as:
ROI = (Net Profit / Total Capital Invested) × 100%
- Track separately for different time periods (daily, weekly, monthly)
- Compare against benchmark indices for context
- Annualize returns for meaningful long-term comparison
Win Rate (Success Probability)
The percentage of profitable trades:
Win Rate = (Number of Winning Trades / Total Trades) × 100%
- Analyze in conjunction with average win/loss sizes
- Monitor consistency across different market conditions
- Combine with QuantWave's forecast accuracy metrics
Sharpe Ratio
Measures risk-adjusted returns:
Sharpe Ratio = (Average Return - Risk-Free Rate) / Standard Deviation of Returns
- Values above 1.0 indicate good risk-adjusted performance
- Helps compare strategies with different volatility profiles
- Essential for evaluating capital efficiency
Advanced Performance Analysis
Profit Factor
Gross profits divided by gross losses:
Profit Factor = Gross Profits / Gross Losses
- Values above 1.5 indicate robust strategies
- More meaningful than win rate alone
Maximum Drawdown
Largest peak-to-trough decline:
- Critical for evaluating strategy risk
- Should never exceed 20% for professional trading
Risk of Ruin
Probability of losing entire capital:
- Function of win rate and risk/reward ratio
- Should be below 1% for sustainable trading
Practical Measurement Approach
- Maintain detailed trade records including entry/exit prices and dates
- Calculate metrics weekly and monthly
- Compare actual results with QuantWave forecast probabilities
- Adjust position sizing based on performance trends
QuantSchool emphasizes that consistent measurement enables continuous improvement. These metrics provide the objective foundation needed to refine strategies and execution.