Direct answer: what is a good forex Sharp ratio?
Most uses of the phrase “Sharp ratio” in forex discussions are likely meant to refer to a general performance statistic, but in the canonical scope of this article the relevant measure is the Kaufman Efficiency Ratio (KER)—sometimes loosely discussed alongside Sharpe-like ideas. There is no single universally correct “good” KER value for all markets and settings. As a general rule, higher KER values indicate that price moved more efficiently in one direction during the lookback window.
Explanation: how Kaufman Efficiency Ratio works
Kaufman Efficiency Ratio is designed to quantify how strongly price movement is dominated by net progress versus total variation. Conceptually, it compares:
- Net movement over the period (the absolute change from the start to the end of the window), and
- Total movement over the same period (the sum of absolute price changes between consecutive bars).
A simplified intuition is:
- If price steadily trends, net movement will be large relative to total movement, so the ratio tends to be higher.
- If price is choppy or mean-reverting, net movement will be smaller relative to total movement, so the ratio tends to be lower.
Practical meaning of “good” in this context
- Closer to 1: the move is mostly directional and efficient.
- Closer to 0: the move is inefficient, with lots of back-and-forth.
Because the ratio is bounded by the relationship between net and total movement (and those depend on the data window), the “goodness” is relative to the market regime you are studying.
Example or checks: verifying what a “high” ratio means
You can independently sanity-check KER behavior without forecasting:
- Pick a clear trending section (for example, a sustained rise or fall) and compute KER over a consistent lookback.
- Expect KER to be relatively higher because end-to-end change is large compared with the back-and-forth.
- Pick a sideways or whipsaw section and compute KER over the same lookback.
- Expect KER to be relatively lower because net change is small compared with total variation.
- Change only one setting at a time (especially the lookback length) and observe how stable the interpretation remains.
- If results swing dramatically, “good” may be too sensitive to your configuration.
Limitations and risks: why there is no universal “good” value
KER can help describe efficiency, but it has important limits:
- Regime dependence: A value that looks high during a trend may be ordinary during another trend, because both net movement and total variation shift with market conditions.
- Lookback sensitivity: Different lookback windows can produce different ratios on the same price series.
- Price definition matters: Using different price inputs (such as close vs. another derived series) can change the measured efficiency.
- No future guarantee: Even if KER is high in the observed past, you cannot infer future outcomes from the ratio alone.
- Risk still exists: Market movements can reverse, and a descriptive indicator does not remove uncertainty.
If you are evaluating a “good” KER in forex practice, treat it as a measurement of how directional the historical movement was over a specific period, not as a stand-alone indicator of profitability or a risk-free signal.