A Sharpe Ratio of 1.5? Great! But… You’ll Still Have Bad Years! A Sharpe ratio of 1.5 is considered strong in trading. It means your strategy delivers solid returns relative to risk. But did you know that even with this, you’ll still have losing or weak years? Here’s why: ✅ A Sharpe ratio of 1.5 means your returns are, on average, 1.5 times bigger than your risk (volatility). ✅ But returns fluctuate—some years are great, some are bad. ✅ 7% of the time, you’ll have a losing year (Sharpe < 0). ✅ 17% of the time, your performance will be weak (Sharpe < 0.5). Where do these numbers come from? Returns tend to follow a normal distribution, meaning they move up and down around an average. We use the Z-score formula to estimate probabilities: Z = (X - μ) / σ Where: - X = Sharpe ratio threshold - μ = Average Sharpe ratio (1.5) - σ = Standard deviation (1, commonly assumed in finance) Now, let’s check the probabilities: 📉 Probability of a Losing Year (Sharpe < 0): Z = (0 - 1.5) / 1 = -1.5 From the Z-table, P(Sharpe < 0) ≈ 6.68% (rounded to 7%). 📉 Probability of a Weak Year (Sharpe < 0.5): Z = (0.5 - 1.5) / 1 = -1.0 From the Z-table, P(Sharpe < 0.5) ≈ 15.87% (rounded to 17%). The Key Takeaway? Even a great trading strategy doesn’t guarantee profits every year. If you quit during the bad years, you never let the probabilities play out in your favor. Good trading isn’t about avoiding bad years—it’s about surviving them.