Donald Richard_ Allen

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What is risk-adjusted return and why is it more important than raw profit?

Raw profits don’t tell the full story—two traders may earn $10,000, but if one risked $100,000 and the other $1 million, their results differ drastically. Risk-adjusted return measures profit relative to risk taken, often using ratios like Sharpe (return per unit volatility) or Sortino (return per unit downside risk). In forex, where leverage magnifies both gains and losses, risk-adjusted metrics prevent illusion of success. Example: a scalper with high win rate but occasional -30% drawdowns has poor risk-adjusted performance compared to a steady trend trader. Institutions allocate capital based on Sharpe ratios, not raw returns. Retail traders benefit by tracking expectancy, drawdown ratios, and variance, ensuring they pursue sustainable growth. Risk-adjusted return focuses on survivability and scalability—turning trading from gambling into a business model.