Sharpe Ratio -> The NeW System

Sharpe Ratio → The NeW System 📈
Calculate and visualize an annualized, smoothed Sharpe Ratio based on daily returns.

What is the Sharpe Ratio? 🤔
The Sharpe Ratio measures risk-adjusted return by dividing the average return by its volatility. A higher Sharpe means you’re earning more reward per unit of risk. In crypto, we assume a 0% risk-free rate.

Indicator Inputs ⚙️
Source
The price series to use (default: close).

Sharpe Rolling Period
Number of days for the rolling average and volatility calculation.

Smoothing Period (EMA)
How many periods to smooth the raw Sharpe with an exponential moving average.

Strong Threshold 🔥
Sharpe ≥ this value shows a “strong” signal in green.

Weak Threshold ❄️
Sharpe ≤ this value shows a “weak” signal in red.

How It Works 🧮
Daily Returns – Calculate the percentage change in price from one day to the next.

Rolling Average – Smooth those daily returns over the chosen Sharpe period.

Rolling Volatility – Compute the standard deviation of daily returns over the same period.

Raw Sharpe – Divide the rolling average by the rolling volatility (with zero-volatility guard).

EMA Smoothing – Apply an EMA to the raw Sharpe to reduce noise.

Annualization – Multiply the smoothed daily Sharpe by √365 to get a yearlyized figure.

Plot & Interpretation 🎨
Line Color

🟢 Green when annualized Sharpe ≥ Strong Threshold (strong risk-adjusted performance)

🔴 Red when annualized Sharpe ≤ Weak Threshold (weak or negative performance)

⚪ Gray when between the thresholds (neutral zone)

Threshold Lines

A dashed green line marks the Strong Threshold.

A dashed red line marks the Weak Threshold.

Pro Tips 💡
A Sharpe around 1 is generally acceptable -> Long term.

Below 0 means you’re losing per unit of risk on average.

Above 2 is excellent—although in crypto, slightly lower values can still signal strength -> Long term.

Use this system to spot when an asset’s risk-adjusted returns are heating up (🔥) or cooling off (❄️), so you can time your trades more effectively!