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Consistency is capital

The most consistent trading strategy will ultimately lead to unparalleled results in the long run.
Paradoxically, consistency in trading both exists and doesn’t exist. This gives us a feel for the weirdness of superposition as is the case with Schrödinger’s cat.

Top profitable traders are consistent, but are they predictably consistent? Hardly @DwightSchrute . This does not mean that the strategy they are using is defective, but rather that it requires improvement.

Consistency depends on a multitude of factors and is ubiquitously improved technically. The less obvious enhancement approaches are the biological one and mental one. The former requires fighting bad habits, while the latter calls for warding off short term obsession with the result and trading in an external state.

This said, the Sharpe ratio is one important indicator investors can use to spot consistency and detect whether the trader is working on optimizing results while sticking to it.

How so? If we attempt to reverse engineer the Sharpe ratio, which is easier said than done, we notice that one path to do so is to generate small returns in a persistent recurrent way and then magnify them through leverage.
Traders would start by reducing volatility through lowering net exposure to a 10% band (it would be helpful if net exposure was added to the statistics), and repeatedly generate small returns while increasing leverage gradually as they go.

Just saying.

True but to some extent.

For instance the Sharpe ratio assumes that financial returns (Stock, Futures, Forex, etc…) are normally distributed.

Well, they are not, far from it (those interested can google for “fat tails”).

And for pure trend-following trading systems, the Sharpe ratio, as a metric, is virtually worthless.

Martingale systems always have high sharpe ratios.

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Welcome to the forum @TheForexSniper !
Regarding your reply and that of @JITF , the suggested way to spot consistency is in relative terms not in absolute ones. This is not simply about a determined minimum Sharpe value.

Imagine a chart where you can simultaneously plot the net exposure, the Sharpe, the leverage and the system performance (the last two can already be plotted on the same chart as you are aware). Investors would then look for periods (which can very well be discontinued notably due to fat tail risk) where the Sharpe and leverage are increasing while the net exposure is banded.
That would constitute a strategy comparison criteria.

What sharpe ratio range are you looking for?

It’s more about the rate of increase of the Sharpe ratio than its value or set of values.

In short, when it comes to the Sharpe, it’s complicated.
This paper from Andrew W. Lo is particularly enlightening regarding this issue.

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