Risk-adjusted Performance
Intro
Absolute returns aren't enough—measure returns relative to risk for a clearer comparison between strategies.
Step-by-step
- Calculate Sharpe ratio to measure excess returns per unit volatility.
- Use Sortino to focus on downside risk.
- Compare strategies using risk-adjusted metrics, not raw returns.
GOLD example
Compare two XAU/USD strategies: one with higher raw returns but higher volatility vs a smoother, lower-volatility strategy; risk-adjusted metrics may prefer the latter.