A Modified Sharpe Indicator That Squares Volatility

Summary

This indicator adapts the Sharpe ratio as a proposed input to a future trading strategy. It calculates log returns over a selected lookback, sums those returns, annualizes return volatility using a trading-day factor, and then divides the return measure adjusted for a risk-free-rate input by volatility squared. The author says this denominator creates a steeper curve and may improve entry timing compared with using standard deviation alone.

The explanation also gives the conventional intuition behind the Sharpe ratio: returns are assessed relative to volatility, with a risk-free return subtracted to isolate compensation for risk. But the modified calculation is not accompanied by tests, examples of signals, or comparative performance evidence. Squaring volatility changes the measure's scaling and interpretation, so the claimed entry benefit remains unverified. The description also sets the risk-free input to zero and does not discuss parameter choice, asset differences, or how the indicator would be combined with exits and risk controls.

Key ideas

• The indicator uses summed log returns over a lookback and annualized return volatility.
• It divides the risk-adjusted return measure by volatility squared instead of standard deviation.
• The stated purpose of squaring volatility is to make the curve more responsive for entries.
• The risk-free-rate input is set to zero in the supplied formulation.
• No backtest or comparative evidence is provided to validate the proposed improvement.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.