Annualizing Sharpe Ratios for Intraday Strategies

# How to derive the sharpe ratio for an intraday strategy


# How to derive the sharpe ratio for an intraday strategy












I have an intraday strategy, which will place 0-5 trades for each intraday trading session. (Note that some days it will not place any trades out). The average duration of a trade is around 33 minutes.

From my understanding, the sharpe ratio formula is calculated as mean of excess return of all the trades divided standard deviation of excess return of all the trades. $$E(Excess\; Return) / \sigma({Excess\;Return})$$ Excess return is return of a trade ($trade\;side \times (\frac{executed\;price}{cost} - 1)$) minus the risk free rate.

Now to calculate the annualized Sharpe ratio, it's normally multiply by $\sqrt{252}$. My question is would the calculation of sharpe ratio be different for my intraday strategy ? Would I use a different multiplier other than $\sqrt{252}$ ?

## Answer by nbbo2 (score 4, accepted)

https://quant.stackexchange.com/a/73989

The Sharpe Ratio is calculated using returns over predefined intervals of time, typically trading days. I do not think returns over each trade (each which lasts a random time averaging 33 minutes) are a valid starting point for calculation of a Sharpe Ratio.

My suggestion is: simulate you trading strategy over a test period of $N$ days. On days when there are no trades, the calculation is easy: the excess return is zero. On other days do a realistic simulation, including rules on position sizing based on your account balance that day (assume you start the first day with 1,000,000 USD), whether you use leverage or not, whether you allow overlap (opening a 2d trade while the first is still under way), what the transaction costs are, etc. Then from the $N$ daily returns compute the Sharpe Ratio in the normal manner.