Why Sharpe Ratio is an Important Indicator for Crypto Trading?

Herding behavior or confirmation bias influences the investment decisions of many traders, mainly when investing in the digital market. We allow our emotions to guide our investment decisions, putting logic on the back burner. However, before investing, especially in a volatile market like crypto, you must understand the risk you are taking. Your investment will only make sense if the possible profit outweighs the risks. If you are one of those who do not keep all of your eggs in the same basket, you’re probably wondering how you can determine the level of risk while maintaining the return you desire. This guide will discuss such a vital crypto metric called the Sharpe ratio, which can aid you in decision-making. What is a Sharpe ratio? Risk and return are the key elements of the financial market, and the crypto market is no exception as achieving a risk-return trade-off is what hodlers desire for. However, today’s investors are so focused on the return on their investments that they overlook the potential financial risks. For instance, Return is a notion we’re all familiar with; I buy Bitcoin for $200 and sell it for $250 a year later, representing a 25% annual return. But, what about the risk? The Sharpe ratio is one of the most important metrics for assessing the risks associated with returns. This ratio can help you analyze the data and offer you logic to calculate your trading strategy’s risk to reward ratio. Overall, the...