what's the most priority betwee CAGR/Max DD% and Sharp ratio ?
When prioritizing between CAGR/Max DD% and Sharpe Ratio, it depends on your strategy's goals and risk tolerance. Here's how to assess their importance:
1. CAGR/Max DD% (Compound Annual Growth Rate / Maximum Drawdown Percentage):
- What it Measures: The growth of your account over time (CAGR) relative to the worst peak-to-trough decline (Max Drawdown).
- Importance: It tells you how much risk (drawdown) you’re taking to achieve returns. A higher CAGR/Max DD means your returns are efficient in relation to the risk you’ve taken.
- When it's Critical:
- When you aim for long-term, steady growth with controlled risk.
- If you prioritize minimizing drawdowns, which is crucial for strategies that need to stay resilient in volatile markets (like your long-term trading approach).
2. Sharpe Ratio:
- What it Measures: The return per unit of risk (volatility). It measures how well your strategy compensates you for the risk taken (volatility of returns).
- Importance: A higher Sharpe ratio (above 1, or ideally above 2) means the strategy offers a better risk-adjusted return. It’s a good metric for comparing different strategies to see which one generates smoother returns relative to volatility.
- When it's Critical:
- When you care about consistent performance and want to compare risk-adjusted returns between strategies.
- If your strategy experiences large fluctuations in returns, the Sharpe ratio helps determine if the higher returns are worth the risk (volatility).
Comparison in Your Strategy:
CAGR/Max DD%: Since you are building a strategy for long-term use, minimizing drawdowns (while still growing your account) is a key consideration. This metric is more focused on the capital preservation aspect and will be vital in avoiding large losses that could wipe out significant portions of your account.
Sharpe Ratio: It's essential for ensuring that your strategy has consistent returns relative to risk. However, if your drawdowns are well-managed (as per the focus on risk control), the Sharpe Ratio becomes secondary in importance.
Which is More Important?
For your strategy goals (focused on long-term performance and risk management): 1. CAGR/Max DD% should be the top priority because it balances growth with minimizing drawdowns. 2. Sharpe Ratio is important but secondary to CAGR/Max DD%. You should still aim for a Sharpe ratio above 1 (preferably 2+), but don't compromise your drawdown management to chase a higher Sharpe ratio.
Conclusion:
Focus on maximizing CAGR/Max DD% to ensure your strategy can grow steadily with minimal drawdowns. A high Sharpe Ratio (above 2) is an excellent goal but secondary to ensuring that your strategy survives long-term market swings with controlled drawdowns.