Last time, we organized the ideas for evaluating EA performance focusing on basic parameters of Quant Analyzer such as total profit, drawdown, and profit factor (PF).
This time (DAY 7), we will go one step furtherto read indicators and graphs such as Sharpe Ratio and the drawdown curveand see how to interpret them.
By deepening these analyses, you should be able to grasp the relationship between risk and return in a more three-dimensional way.

What is the Sharpe Ratio

Sharpe Ratiois a metric for understanding the investment/management’s “risk-adjusted return,” which is not easily seen by simple profit amount or win rate.

Concept of the calculation
The Sharpe Ratio is calculated as “(portfolio return − risk-free rate) ÷ risk (standard deviation).”
In forex and other trading, risk-free rate is often assumed to be zero, so it is essentially close to “return divided by standard deviation.”
Higher numbers mean greater efficiency
Generally,a Sharpe Ratio of 1.0 or higheris considered to indicate returns that are commensurate with the risk. However, it can vary with market conditions and the length of the trading period, so treat it as a guideline.

Difference from Sortino Ratio

**Sortino Ratio** is similar to the Sharpe Ratio but uses only the “downside risk (negative returns) variability” instead of standard deviation.
In other words, it is a metric that focuses on the downside fluctuations rather than the upside swings.

Suitable for those sensitive to drawdown
Sortino Ratio zooms in on whether returns are commensurate with the downside risk, so it is a metric that those aiming for low drawdown or prioritizing loss avoidance in their trading style tend to pay attention to.

Reading the Drawdown Curve

In Quant Analyzer, apart from the equity curve, there is sometimes a chart called thedrawdown curve that graphs the drawdown over time.
This makes it visually clear when and how much the asset fell from its peak during the trading period, helping you image the EA’s stability and mental load more concretely.

Whether there are temporary sharp declines
If a deep trough appears on the drawdown curve, the EA may incur substantial losses in certain market conditions.
Whether there is a series of shallow declines
Conversely, if the drawdown gradually reduces assets over a long period, you may feel steadily pressured. It’s important to consider beforehand whether you can endure this.

The “Dialogue” between Risk and Return

By combining Sharpe Ratio, drawdown curve, and other indicators, you can see not just “whether you win or lose,” but more clearly “how you win and how you lose.”

If you seek high returns, are you ready to accept deeper drawdowns?
EA with high win rates or profitability often allows some temporary large drawdowns as part of the logic.
If you prioritize loss avoidance, can you accept somewhat lower returns?
A logic that minimizes drawdown naturally makes explosive returns less likely.
It is ideal to clearly define “how long, how much risk, and how much profit you aim for” and then select and tune the EA accordingly.

Points to be mindful of in actual operation

Dealing with sudden market fluctuations
Sharpe Ratio and drawdown curves are calculated from past data. Major fundamental events or black swan scenarios are not something these indicators can predict.
Frequency of parameter changes
If you tweak the logic too much, backtests and forward tests lose continuity, and data reproducibility drops. Rather than tinkering in a rush,it is more practical to regularly evaluate the initial trading rulesyou set.

Today's summary and next time teaser

Sortino Ratio is calculated focusing on downside risk,making loss avoidance more prioritizedfor traders.
Based on numbers and graphs,think about what level of risk you can tolerate, and select and tune the EA accordinglyas a prudent approach to operation.

Next time (DAY 8) will be themed “EA Operation and Mental Management — It’s not just about setting and leaving it” and will explain how to manage mental aspects that numbers alone cannot cover and how to address common anxieties during EA operation. Even with automated trading, human psychological challenges remain.

Introduction to the EAs I Sell

If you are interested in selecting an EA or analyzing performance, please take a look at the EAs I sell.
https://www.gogojungle.co.jp/users/147322/products

By checking Sharpe Ratio and the drawdown curve, you should be able to make a more satisfying choice.

In the next article, I will focus on the balance of mental aspects and operating style and explain how to take your EA operation to the next level.
Please press “Read more” to continue deepening your learning.

DAY 7: Quant Analyzer Advanced—Interpreting the Sharpe Ratio and Drawdown Curve