# What is the disadvantage using the edge ratio?

I want to evaluate and optimize an algorithmic trading system. For this I want to follow a step by step approach - first looking at the entry, later at other aspects of it (money management, position management, exit management etc.)

I discovered the edge ratio or eratio (see edge ratio) that also exists in some variations (see edge of an entry signal).

I got the impression that the edge ratio is not so much used as compared to other figures/techniques like the Sharpe ratio, a mae mfe analysis etc.

I would like to know whether there is any disadvantage of using the edge ratio.

• Isn't the quantity amount of entries that have been generated in a certain time missing? Otherwise an entry generator that e.g. only generated 2 trades per year but has a slightly better edge ratio at a certain time would be superior to another entry generator that made 200 entries per year. And yes, now it will probably get complicated, as people might ignore another entry if they are already in a position. So not the whole amount of entries might really be usable, are they? - Does anybody have thoughts on this aspect? – Claudia Rosso Aug 8 '20 at 16:13

## 2 Answers

I can think of a number of reasons not to use the "e-ratio":

1. Potential investors will routinely ask about your Sharpe ratio, but I have never heard of one using the edge ratio.
2. The statistical properties of the Sharpe ratio are well understood, whereas the edge ratio seems not to have been well studied.
3. By Chebyshev's inequality, a high Sharpe ratio (well, signal-noise ratio) translates to a high probability of positive returns. This is Roy's "Safety First" argument. It is not clear that a high edge ratio translates to a high probability of "success" of an investment, however you measure that.

The e-ratio is simply a tool to measure the quality of entries and it says nothing about the overall performance of a trading strategy. It answers the question "Is this a good entry technique?" and perhaps "What is the optimum average holding length?"

It is a strategy development tool, not a strategy assessment tool.