Sharpe and average R:R

~4 min read

Sharpe tells you whether your returns compensate the volatility. R:R tells you whether your system needs to hit a lot or a little to be profitable.

The essentials

Sharpe < 1 inefficient; 1–2 good; > 2 very good; > 3 suspicious or short sample.
R:R = Avg_Win ÷ |Avg_Loss|.
Break-even WR = 1 / (1 + R:R). If your R:R is 2, you need >33% WR.

Sharpe = (return − risk_free) ÷ volatility

Sharpe < 1 — inefficient, you take on a lot of volatility for the return you get.
Sharpe = 1–2 — good, what most hedge funds publish.
Sharpe > 2 — very good.
Sharpe > 3 — suspicious, very rare to maintain real >1 year (might be short sample or no costs included).

R:R = Avg_Win ÷ |Avg_Loss|

R:R = 1.0 — you win and lose equally on average. You need WR > 50% to be profitable.
R:R = 2.0 — you win twice what you lose. With WR = 35% you're already profitable.
R:R = 3.0 — typical swing/trend traders. With WR = 28% you make money.
R:R < 1 — high-WR scalping. You need WR > 60–70% for it to work (little margin for error).

Drawdown and Recovery factor

Drawdown is what can kill you (literally, in propfirms). Recovery factor tells you whether the reward compensates.

Risk per trade

Amount in USD (or %) you risk on a single trade. The most important money-management metric and the most abused by inconsistent traders.

Day × session heatmap

Visual matrix crossing day of week with market session. Each cell shows net P&L traded at that intersection.

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