Mason Christopher J Young#40

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What is Sharpe ratio in forex trading?

The Sharpe ratio measures risk-adjusted returns by comparing a strategy’s excess return over the risk-free rate to its volatility. A higher Sharpe ratio indicates better performance relative to risk. For example, a system that generates 15% annual returns with 10% volatility has a Sharpe ratio of 1.5. In forex, traders use it to compare strategies or evaluate automated systems. Ratios above 1 are considered acceptable, above 2 are good, and above 3 are excellent. However, the Sharpe ratio assumes normally distributed returns, which may not hold true in forex markets with fat-tail risks.