This ratio is used to compare all statements.

Of course, there is no magic formula. We can't take in consideration all factors, like the importance of the money management, the frequency of trades per day/month/year, the duration of the statements, the modelling quality, etc ... it's up to each trader to see what is the more suitable for their own way of trading.

We'll try to take the same balance (10k) and the same duration (10-12 months), at least for the strategy tester statements. Also we'll try to have a Modelling quality of 90%.

This ratio is first about the risk taken with the trading system.

For backtesting detailed statements :

Code:
Ratio = (Total net profit/Balance)/RDD
Example : Total net profit = 5860.5; Balance = 10000; RDD = 27.52%. Ratio = (5860.5 / 10000) / 0.2752 = 2.12

For live and demo statements :

Code:
Ratio = ((Gross profit+Open trades)/Balance)/RDD
Example : Gross profit = 2350.5; Open trades = -356.2; Balance = 10000; RDD = 15.76%. Ratio = (2350.5 + (-356.2)) / 10000 / 0.1576 = 1.26

The RDD is the Relative Drawdown.

Higher is the ratio, more secure are the settings (theorically).