Risk & Money ManagementDrawdown-Adjusted Return
Calmar Ratio
Annualised return divided by maximum drawdown over the same window, conventionally measured across three years.
What Calmar Ratio means
The Calmar ratio divides the compound annualised rate of return by the absolute value of the maximum drawdown suffered over the measurement period. Where Sharpe and Sortino describe volatility, Calmar describes pain: it states how much annual return was produced for each unit of the worst peak-to-trough decline. The conventional window is thirty-six months, which is long enough to include at least one meaningful setback in most strategies while remaining recent enough to reflect the current approach.
A ratio above 1 means the strategy earned more in a typical year than it gave back in its worst episode, and values around 3 or higher are usually regarded as strong. The structural weakness is that the denominator rests on a single historical observation rather than a distribution, which makes the ratio extremely sensitive to the period chosen. A short or unusually calm sample will produce a small maximum drawdown and a flattering score that a longer record would quietly demolish.
Worked example
A strategy compounding at 24 percent a year whose worst peak-to-trough decline over the same three years was 30 percent has a Calmar ratio of 24 divided by 30, or 0.8.
Related terms
- Maximum DrawdownThe largest peak-to-trough equity decline recorded over a given period of trading or testing.
- Sharpe RatioA risk-adjusted return measure: return in excess of the risk-free rate divided by the standard deviation of returns.
- Sortino RatioA variant of the Sharpe ratio that divides excess return by downside deviation only, ignoring upside volatility.
- DrawdownThe decline from a peak in account equity to a subsequent trough, usually stated as a percentage of the peak.
- BacktestingReplaying a strategy's rules over historical price data to estimate how it would have performed before risking real money.
Frequently asked questions
What does Calmar Ratio mean in forex trading?
Annualised return divided by maximum drawdown over the same window, conventionally measured across three years.
How does Calmar Ratio work in practice?
A ratio above 1 means the strategy earned more in a typical year than it gave back in its worst episode, and values around 3 or higher are usually regarded as strong. The structural weakness is that the denominator rests on a single historical observation rather than a distribution, which makes the ratio extremely sensitive to the period chosen. A short or unusually calm sample will produce a small maximum drawdown and a flattering score that a longer record would quietly demolish.
What is an example of Calmar Ratio?
A strategy compounding at 24 percent a year whose worst peak-to-trough decline over the same three years was 30 percent has a Calmar ratio of 24 divided by 30, or 0.8.
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