> For the complete documentation index, see [llms.txt](https://docs.sudo.finance/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.sudo.finance/trade-on-sudo/educational-resources/what-is-sharpe-ratio.md).

# What is Sharpe Ratio

### Sharpe Ratio: Risk-Adjusted Returns

The Sharpe Ratio is a metric used to evaluate the *quality* of your trading strategy — not just how much you earn, but *how much risk you take* to earn it.

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📊 Formula:&#x20;

Sharpe Ratio = (Average Return − Risk-Free Rate) / Standard Deviation of Return

🧠 Why It Matters:

• Higher Sharpe = smoother, more stable returns

• Lower Sharpe = big swings, high volatility

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🔼 How to Improve Sharpe Ratio:

• Focus on setups with high risk-to-reward (R:R)

• Cut losing trades quickly

• Reduce trade frequency and avoid noise

• Keep a trade journal to iterate and improve