When the sharpe ratio is above its signal, this implies the investment is currently outperforming compared to its typical return, below the signal means the investment is currently under performing. A negative Shape would mean that the investment has not provided a positive return, and may be a possible short candidate.
In true TradingView spirit, the author of this script has published it open-source, so traders can understand and verify it. Cheers to the author! You may use it for free, but reuse of this code in a publication is governed by House Rules. You can favorite it to use it on a chart.
study("Trailing Sharpe Ratio") src = ohlc4, len = input(252, title = "Time Frame (252 is one year)") //mean = sma(src,len) dividend_yield = input(0.0000, minval = 0.00001, title = "Dividend Yield? Enter as Decimal, USE 12 MONTH TTM!!!") pc = ((src - src[len])/src) + (dividend_yield*(len/252)) std = stdev(src,len) stdaspercent = std/src riskfreerate = input(0.0004, minval = 0.0001, title = "risk free rate (3 month treasury yield), enter as decimal") sharpe = (pc - riskfreerate)/stdaspercent signal = sma(sharpe,len) calc = sharpe - signal plot(sharpe, style = line, color = calc < 0 ? red : green, linewidth = 2) plot(signal, style = line, color = purple, linewidth = 2)