Sharpe Ratio
A measure of risk-adjusted return that shows how much excess return a strategy generates per unit of volatility.
The Sharpe ratio measures how much return a trading strategy produces relative to the risk it takes on, expressed as a single number. It was developed by economist William Sharpe and remains the most widely used risk-adjusted performance metric in both traditional asset management and algorithmic trading.
A strategy that returns 30% a year with wild, unpredictable swings is a very different proposition from one that returns 30% a year smoothly. The Sharpe ratio captures that difference: it divides a strategy's excess return (return above a risk-free rate) by the standard deviation of its returns.
Sharpe Ratio = (Return − Risk-Free Rate) ÷ Standard Deviation of Returns
Two MT5 algorithms both return 25% annually. Algorithm A has a Sharpe ratio of 2.1; Algorithm B has 0.9. Algorithm A produced that return with far less volatility along the way — a smoother equity curve, shallower drawdowns, and more consistent monthly results.
Why it matters
Return alone is a misleading way to compare trading algorithms, because it says nothing about the ride you'd have to endure to get there. A Sharpe ratio above 1 is generally considered acceptable, above 2 is strong, and above 3 is excellent for a systematic strategy.