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The Sharpe Ratio is defined as Sharpe ratio = (Mean portfolio return − Risk-free rate)/Standard deviation of portfolio return.

Unfortunately, this does not make sense in the context of an HFT strategy. In order to calculate the return of a portfolio, you need to know the amount of capital deployed in an HFT strategy, which is not as straightforward as a portfolio of long/short stocks.

Should you calculate your return for an HFT strategy based on the margin posted for a specific strategy? Or is the inverse of the coefficient of variation (AvgPnL / StdDev) the best we can hope for?

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  • $\begingroup$ I'd say avgPnL/stdPnL is fine $\endgroup$ – LazyCat Aug 8 '18 at 14:07
  • $\begingroup$ Thanks @LazyCat. Would you say targeting similar values in the Investopedia article makes sense? I.e., 1=ok, 2=good, 3+=excellent? $\endgroup$ – Scott Skiles Aug 8 '18 at 14:10
  • $\begingroup$ I'd say the values should be higher, e.g. 3-4 is good, but not excellent, but it depends on a strategy and what exactly you call HFT.. $\endgroup$ – LazyCat Aug 8 '18 at 14:38
  • $\begingroup$ Agreed. Just double checking. $\endgroup$ – Scott Skiles Aug 8 '18 at 15:04
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Use daily P&L rather than return rate1.

$$ Sharpe = \frac{\mu}{\sigma} $$

To annualize, multiply by the square root of the number of trading days in the year. For US equities, that would be 252.

$$ Annualized\ Sharpe = \frac{\mu}{\sigma} \times \sqrt{252} $$

As for what kind of Sharpe you should target, the lowest I've seen is 5 in practice. A good strategy is more like 8, and the highest end goes into the double digits. The consistency of HFT is incomparable to every other kind of trading strategy.

1In practice, I've never seen returns used to compute the Sharpe, even in low-frequency stat-arb strategies. Also, I've never seen anyone remove the risk-free rate, even if that's what every textbook states.

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