Investing 101

The Surprise Move of a security is a modified version of the Sharpe Ratio: whereas the latter indicator measures the return of a security divided by the volatility of the security during the move, the Surprise Move divides the return of a security by the risk regime before the move took place.

This modification of the Sharpe Ratio allows the indicator to highlight how a relatively small move was quite large within the context of a pre-existing low-volatility environment, and conversely a large rebound was not so out of the ordinary, if seen under the light of a tumultuous high-vol regime that maybe came after a large drop.

The indicator is an oscillator of sorts, allowing investors to answer questions like “What happened the last 10 times that S&P 500 fell 2 standard deviations?”. It is usually used as a mean reversion guide.

Did you know that the Surprise Move of a security is just a modified version of the Sharpe Ratio?

Surprise Move Indicator

Technical Indicators 

The Sharpe Ratio for a security is a measure of its return divided by its volatility. It normalizes the size of the move by comparing it to recent history, so that it’s easier for traders to gauge the significance of the move itself. When you hear in the media that “the market fell 2 standard deviations” they refer to the Sharpe Ratio of the security.

The indicator is an oscillator of sorts, allowing investors to answer questions like “What happened the last 10 times that S&P 500 fell 2 standard deviations?”. It is usually used as a mean reversion guide.

The indicator is named after Nobel prize-winner William F. Sharpe, who developed it in 1966. Originally the calculation subtracted the risk-free rate from the return calculation.

