Choosing Daily Returns for Sharpe Ratios from Intermittent Trades
Summary
The document asks how to calculate a Sharpe ratio from a month of trades with varied holding periods and inactive days. The response emphasizes that a Sharpe ratio requires returns on a consistent sequence of periods, rather than a list of trade-level percentage outcomes alone. It outlines three possible data choices: enter zero returns on days without trades, track total portfolio performance daily, or track each position daily and reconcile the results.
Daily portfolio returns are presented as the simplest practical series, while position-level tracking can better preserve trade detail but creates reconciliation questions when positions span different durations. The response does not calculate a ratio from the example or settle how to choose a risk-free return, handle overlapping positions, or annualize the result. Its central caution is that a trade list cannot be converted unambiguously into a Sharpe ratio without defining the return series and treatment of inactive periods.
Key ideas
- A Sharpe ratio requires returns measured over consistent time periods.
- Trade-level returns with different holding lengths do not directly form a daily return series.
- Possible approaches include zero returns on inactive days, daily portfolio returns, or daily position returns.
- Position-level tracking needs a clear method for reconciling positions with differing durations.
- The document does not prescribe risk-free returns or calculate the example's Sharpe ratio.
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Full text
# how to calculate the Sharpe ratio based on a list of trades, with space between them? # how to calculate the Sharpe ratio based on a list of trades, with space between them? First, there are a few things I'm not clear about, like what the 'risk free' return is.. is there even such a thing in trading? or how to handle inactive days, etc. Let's assume I have a period of 30 days. During these 30 days, I have 5 trades with their duration: - +5%, 2 days - -3%, 5 days - +1%, 3 days - +2%, 1 day - -2%, 3 days I have 16 days where there is no activity. How would I calculate the Sharpe ratio from these values? I see a lot of questions on the topic, but I'm looking for a down-to-earth "here is to calculate it based on this concrete data" rather than a formula that has elements that I don't know how to interpret in this specific context. ## Answer by alphazwest (score 0) https://quant.stackexchange.com/a/75543 Firstly -- you need a value for each period during your trading window to calculate the Sharpe ratio. Looking at your data, you have three options IMO: - Put 0.0 values for the days that you didn't trade - Track your total portfolio performance, per day. - Track the performance of each position, per day, and reconcile at the end `#1` would be a little odd if you're concern is individual position tracking. `#2` would be the easiest, but wouldn't really take into account individual trades which might run against what you're trying to achieve here. `#3` sounds great, but would be more complex to reconcile and report over a period of time. For example, if you calculate the SR for a position you held for 3 days, then again for a position you held for 5 days, the you effectively have 2 SR values over two differing periods (3 and 5 days, respectively.) So how do you reconcile that? Straight mean? Weighted mean? What about the days you didn't trade? Are you negative on those days if the market moves up?
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