What is the Sortino ratio?
In one line: The Sortino ratio divides average return by downside deviation, a measure of only the losing swings, so big wins don't count against a strategy.
The idea
The Sharpe ratio compares return with all swings, up and down. So a big win counts as "risk."
The Sortino ratio only counts the swings below a target, usually zero. It asks: how much return did you get for each unit of bad swing?
The formula
Sortino = (average result − target) ÷ downside deviation
Downside deviation: take each result below the target, square it, count every other result as 0, average them, then take the square root. (Fund reports usually also subtract a risk-free rate. We leave it out to keep this simple.)
A simple example
10 trades, in units of risk (R), with a target of 0:
+3, −1, −1, +2, −1, −1, +1, −1, −1, +2
Step 1. Average. Total = +2R. 2 ÷ 10 = 0.2R per trade.
Step 2. Downside deviation. 6 losses of −1. Squared, each is 1. That's 6. The 4 wins count as 0. Average over all 10: 6 ÷ 10 = 0.6. Square root ≈ 0.77.
Step 3. Divide. 0.2 ÷ 0.77 ≈ 0.26.
For the same 10 trades, the Sharpe-style math (using the full standard deviation, about 1.54) gives about 0.13. The Sortino is about twice as high, because the big +3 win isn't treated as risk. A math example, not a promise.
Why it matters
Many trading methods lose small and win big. Sharpe can make those look worse than they feel. Sortino focuses on the part that hurts: the losing swings.
It's one of several ways to compare results with risk, alongside max drawdown and the Calmar ratio.
A common mistake
Comparing Sortino numbers built differently. Different tools use different targets, time periods (per trade, daily, monthly) and yearly scaling. A daily number and a monthly number aren't comparable. Only compare ratios built the same way, on a fair sample size.
For your own trades, start simpler: Expectancy and max drawdown in R tell you most of what Sortino does.
Questions
What is a good Sortino ratio?
Higher means more return for each unit of downside swing. Fund reports often treat yearly values above 1 or 2 as solid, but it depends on how it's calculated, and past results don't guarantee future ones.
What's the difference between the Sharpe and Sortino ratios?
Sharpe uses all swings, up and down. Sortino uses only the swings below a target, so big wins don't lower it.
Can the Sortino ratio be negative?
Yes. If the average result is below the target, the ratio is negative.
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