Currency trading analyst Cody Burgat says that while the Sharpe ratio is one of the most widely cited performance metrics in finance, relying on it alone can lead traders to draw flawed conclusions about the quality and durability of automated trading strategies.
“The Sharpe ratio is useful, but it’s incomplete,” Burgat explains. “It measures volatility, not risk in the way traders actually experience it.”
According to Cody Burgat, the Sharpe ratio evaluates returns relative to total volatility, treating upside and downside price movement equally. While this framework may be appropriate for traditional portfolio analysis, it often fails to capture the realities of algorithmic trading, where drawdowns, tail risk, and sequence of returns matter far more than smoothness.
“Traders don’t lose sleep over upside volatility,” Burgat says. “They lose sleep over drawdowns.”
Burgat notes that automated trading strategies can generate attractive Sharpe ratios while still exposing capital to prolonged drawdowns or infrequent but severe losses. Strategies that produce steady small gains may appear statistically stable, yet remain vulnerable to sharp regime shifts or liquidity events that the Sharpe ratio does not adequately penalize.
“A strategy can look excellent on paper and still be untradeable in practice,” says Cody Burgat.
Another limitation, Burgat explains, is that the Sharpe ratio assumes returns follow a normal distribution. In currency markets, returns are often skewed, fat-tailed, and influenced by sudden macroeconomic developments such as central bank decisions or geopolitical shocks.
“FX markets don’t behave neatly,” Burgat says. “Metrics built on idealized assumptions can miss real-world risk.”
Burgat also emphasizes that the Sharpe ratio provides no insight into how a strategy performs during stress periods. Two strategies with identical Sharpe ratios may behave very differently when markets become volatile, leaving traders unprepared for the emotional and financial impact of adverse conditions.
“What matters isn’t how a strategy looks on average,” Burgat explains. “It’s how it behaves when conditions are unfavorable.”
Instead of focusing solely on Sharpe ratio, Burgat encourages traders to evaluate automated strategies using a broader framework that includes drawdown analysis, risk-reward characteristics, consistency across market regimes, and alignment with the trader’s risk tolerance.
“No single number can define strategy quality,” says Cody Burgat. “Good systems are built on balance, not optimization.”
Ultimately, Burgat believes that while the Sharpe ratio can be a helpful reference point, it should never be treated as a standalone measure of success in algorithmic trading.
“Metrics are tools, not answers,” he concludes. “Understanding their limitations is just as important as understanding their value.”
About Cody Burgat
Cody Burgat is a currency trading analyst focused on algorithmic trading strategies, performance evaluation, and risk management. He provides independent analysis on foreign exchange markets and systematic trading approaches, helping traders interpret metrics, manage drawdowns, and assess long-term strategy durability.
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