Formula
Sharpe ratio = (Return minus Risk-free rate) / Standard deviation of returns
For EA backtests, the risk-free rate is often set to zero (conservative) or the current T-bill rate.
Benchmarks for EAs
- Below 0.5: poor risk-adjusted return
- 0.5-1.0: acceptable but not impressive
- 1.0-2.0: solid, most professionally managed strategies operate here
- Above 2.0: exceptional — verify the backtest is not overfit
Limitation
Sharpe penalises upside volatility equally with downside volatility. A strategy with large but consistent winning months is penalised even if it never has losing months. The Sortino ratio addresses this.