Calculating Sharpe Ratio from Trade P&L

Summary

The discussion explains how to turn a stream of intraday trade profits and losses into periodic returns for a Sharpe ratio calculation. Choose a starting account balance, aggregate the trade results to the end of each chosen interval, and compare that balance with the balance at the interval's start. The resulting periodic returns provide the observations used to calculate their mean and standard deviation.

The answer says simple returns are standard practice and notes that log and simple returns tend to be close over short intervals unless volatility is very large. The example does not prescribe an appropriate starting balance or sampling interval, and those choices affect reported returns and Sharpe estimates. The text gives no empirical comparison or guidance on costs, cash flows, or annualization, so it offers a basic calculation framework rather than a complete performance-measurement procedure.

Key ideas

• Trade profits and losses need to be converted into account returns over consistent time intervals.
• Each periodic return compares the interval-end balance with the interval-start balance.
• The calculation requires a starting account balance and a defined sampling interval.
• Simple returns are presented as standard, with small differences from log returns over short intervals when volatility is modest.

Tags

# How should I calculate sharpe ratio when all I have are raw returns of daily trades?


# How should I calculate sharpe ratio when all I have are raw returns of daily trades?












let's say I have my intraday trades like below:

2025-01-01 08:00:00 $12

2025-01-01 08:01:01 -$18

2025-01-01 08:04:05 $20

2025-01-01 08:10:10 -$5

2025-01-01 08:29:20 $10

etc, a lot more than just 5, spanning over several days.

Should I assume a starting cash level like $10000? And calculate daily returns as percentage first? I'm not sure how much starting cash I should assume.

I read somewhere that I should calculate it using log returns but not sure exactly how to do that. Please help.

## Answer by Newquant (score 1)

https://quant.stackexchange.com/a/82074

You will have a starting cash balance of $N, at T+t (could be 1 hour, 6 hours, 1 day, etc) calculate the balance at T+t then divide by the balance at T, -1 and that is your periodic return. Find your mean & std and then you will have your Sharpe ratio.

I believe it's standard practice to use simple returns, but if you choose a small 't' (like 1 hour) the difference between simple and log in practice will be very small unless your volatility is very large.

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