The Calmar Ratio: Return Compared With Your Worst Drawdown

The Sharpe ratio measures return against day-to-day volatility. But what most traders actually fear is the big drawdown. The Calmar ratio, introduced by Terry Young in 1991, compares your return with the deepest drop your account has suffered.

The formula

Calmar ratio = Annualized return ÷ |Maximum drawdown|

Traditionally it is calculated over the last 36 months, but you can use any period, as long as you are consistent.

Example: your account returned 24% per year, and its maximum drawdown was −12%. Calmar = 24 ÷ 12 = 2.0.

Another account returned 40%, but had a −40% drawdown. Calmar = 1.0. Despite the higher return, it delivered less return per unit of drawdown.

What values are good?

As a rough guide:

• Below 0.5: drawdowns large relative to returns.
• 0.5 to 1.0: acceptable.
• 1.0 to 3.0: good.
• Above 3.0: very good, or a period without a real test.

Why it is useful

• Intuitive. "I make twice my worst drawdown per year" is easy to understand.
• Focuses on pain. The drawdown is the number that ends careers and makes traders abandon good strategies. See maximum drawdown.
• Useful for comparing sizing. Doubling position size roughly doubles both return and drawdown, so the Calmar ratio stays similar. It describes the strategy rather than how aggressively it was traded.

Limitations

• One number dominates. Maximum drawdown is a single event. A strategy might have one bad drawdown and otherwise behave well.
• Short histories flatter it. Over a short period, you may not have seen a typical drawdown yet.
• Ignores how long drawdowns last.

Use it with others

Pair Calmar with the Sharpe and Sortino ratios and with drawdown duration. Together they describe both the typical and the worst-case experience of a strategy.

In TradeThink

The Calmar ratio, maximum drawdown and annualized return are on the statistics page, with a drawdown chart on the dashboard and reports.