Trading Concept
Sharpe Ratio
A measure of risk-adjusted return — the excess return per unit of volatility, where higher values indicate more return for the risk taken.
The Sharpe ratio divides the strategy's excess return (return above the risk-free rate) by its volatility (standard deviation of returns). A ratio of 1.0 means one unit of excess return per unit of risk. Above 2.0 is strong. Below 0.5 is marginal.
The ratio is useful for comparing strategies on equal footing. A strategy returning 30% with 40% volatility (Sharpe 0.75) is less efficient than one returning 15% with 10% volatility (Sharpe 1.5). The second strategy produces more return per unit of risk, even though the headline return is lower.
In the botwir3 runtime, the Sharpe ratio is a diagnostic metric — it appears in backtest output and ledger analysis. It does not drive gate decisions directly. The gate operates on the configured tolerance band, not on risk-adjusted metrics. The user reads the Sharpe ratio to evaluate whether the strategy is delivering returns efficiently relative to the volatility it produces.