What is a MAR Ratio and how do you use it?
What is it?
The MAR ratio gets its name from the Managed Accounts Reports newsletter in 1978 where Leon Rose developed this metric. A MAR ratio is a measurement of risk-adjusted returns that can be used to compare the performance of different trading strategies. The MAR ratio is calculated by dividing the compound annual growth rate (CAGR) of a trading strategy since its inception by its max drawdown. To be able to compare our strategies using the MAR we need to know what a good MAR ratio is.
What is a good MAR ratio?
First of all, you shouldn't make a strategy with the goal of purely producing a high MAR ratio because then you will probably curve-fit your strategy. The MAR ratio is best used on a finished strategy to simply compare two similar kinds of strategies. Every trader that uses the MAR ratio as a metric will use different targets but after testing more than 800+ strategies I can say that it is incredibly hard to find a strategy above the 1.0 MAR ratio. Most robust strategies that I have encountered have been around 0.2-0.4 MAR ratio, personally I want a minimum of 0.5 MAR on a strategy to even consider adding the strategy to my portfolio but that doesn't mean that strategies with less than that aren't valuable in your portfolio.
However, on a portfolio, you can also measure the MAR ratio and here it is different. Your portfolio should consist of strategies with different timeframes, methodologies and underlying assets so your portfolio should be able to achieve a much higher MAR ratio than an individual strategy. Here the target should be a minimum 1.0 MAR ratio, because of your ability to combine long and short strategies and multiple timeframes you should be able to reduce your drawdown in a portfolio and therefore achieve a greater MAR ratio. Every trader will have strategies that can be valuable without having a good MAR ratio but if I had to create a benchmark of what a good MAR ratio is, it is this.
Minimum MAR ratio targets:
Individual Strategies: 0.5+
Portfolio with multiple strategies: 1.0+
How is it calculated?
The MAR ratio is calculated by dividing the compound annual growth rate (CAGR) of a trading strategy or portfolio since its inception by its max drawdown.
Let's start with the CAGR, this is the mean annual growth rate over a specified time period longer than one year. Convert this rate into a percentage:
Now we need to measure the max drawdown (MDD), this is the maximum observed loss from a peak to a trough of a strategy before a new peak is attained. Convert this ratio into a positive percentage:
Finally, let's calculate the MAR ratio:
