How to read a Sharpe ratio
The Sharpe ratio answers one question: how much return did this trader get for the swings they took. Two traders can end a quarter at the same profit, and the one who got there without large drops has the higher Sharpe.
Rough reading: below 1.0 the returns do not clearly beat the volatility, above 1.0 is good, above 2.0 is strong. Those bands come from long-horizon asset management, and they are generous when applied to a few dozen resolved markets.
Where the Sharpe ratio misleads in prediction markets
Sharpe assumes returns that spread out symmetrically around an average. Prediction-market returns do not. A binary contract pays $1 or $0, so a trader who buys long-shot Yes shares at $0.05 posts small steady losses and occasional 20-fold gains. Standard deviation reads those gains as risk and pushes the Sharpe down.
Sharpe is also easy to inflate on a short sample. Ten resolved markets in a calm month can produce a Sharpe above 3 that says nothing about skill. Read it next to the number of resolved markets, and next to max drawdown, which counts the worst stretch instead of averaging it away.
Where 0xinsider uses the Sharpe ratio
Trader profiles chart rolling Sharpe over 7-day and 30-day windows, beside rolling expectancy and the drawdown series. Read Sharpe alongside realized profit and loss history to understand the variability behind a return.
