Evaluating Algo Trading Strategies: Sharpe, Sortino, and Drawdown

A strategy that made 50% last year sounds great until you learn it also had a 70% drawdown. Proper strategy evaluation in algo trading requires multiple metrics, not just returns.

Sharpe Ratio

The Sharpe ratio measures return per unit of total risk: Sharpe = (Mean Return - Risk Free Rate) / Std Dev of Returns. A Sharpe above 1.0 is good for a crypto algo trading strategy. Above 2.0 is exceptional. Above 3.0 is suspicious.

Sortino Ratio

The Sortino ratio only penalizes downside volatility, not upside. It's a better measure for algorithmic trading python strategies with asymmetric return profiles like momentum or trend following.

Maximum Drawdown

Max drawdown measures the worst peak-to-trough decline in your equity curve. A high-Sharpe strategy with a 50% max drawdown is psychologically and practically impossible to trade through. Always report max drawdown alongside returns in any algo trading course project or investor pitch.