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Sortino Ratio

A risk-adjusted return metric similar to Sharpe but only counts downside volatility — better for asymmetric strategies.

The Sortino ratio is a refinement of the Sharpe ratio. It measures the return of a strategy relative to its DOWNSIDE volatility (only the bad variance), not total volatility. The formula: (return − risk-free rate) / downside deviation. The reason Sortino is better than Sharpe for many strategies: upside volatility is a feature, not a bug. A strategy with massive winners has high Sharpe-style volatility but that's not bad — that's the whole point. Sortino correctly recognizes that traders only want to be punished for losses, not gains. A Sortino above 2.0 is good. Above 3.0 is excellent. Sortino is always higher than Sharpe for the same strategy because it's measuring less variance. Use Sortino when comparing trend-following strategies (which tend to have asymmetric distributions).

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Real trade example

Chris Cole's Artemis Capital, a long-volatility fund, regularly posts Sharpe ratios that look mediocre but Sortino ratios in the 3-4 range. The asymmetric upside is fairly counted only by Sortino.

Frequently asked about sortino ratio

What is a sortino ratio in trading?+
A risk-adjusted return metric similar to Sharpe but only counts downside volatility — better for asymmetric strategies.
When will I see sortino ratio used in real trading?+
On modern fund manager performance reports and quant trading pitch decks. Less common in retail because most retail tools only show Sharpe.
What is the most common mistake traders make with sortino ratio?+
Comparing Sortino to Sharpe across strategies. Each ratio has different math — you can only meaningfully compare Sortino to Sortino or Sharpe to Sharpe.
What do experienced traders know about sortino ratio that beginners don't?+
For trend-following and breakout strategies, always look at Sortino instead of Sharpe. The asymmetric return distributions of these strategies are unfairly punished by Sharpe's symmetric variance penalty.

Related terms

Sharpe Ratio

advanced

A risk-adjusted return metric that measures how much excess return you're getting per unit of risk — higher is better.

Expectancy

advanced

The average dollar (or R) amount you can expect to make per trade over many trades — the math behind whether a strategy works.

Drawdown

intermediate

The peak-to-trough drop in your account equity — a measure of how bad your worst losing streak got.

CAGR (Compound Annual Growth Rate)

intermediate

The annualized rate of return that an investment would have earned if it grew at a steady rate every year — used to compare strategies over time.

R-Multiple

intermediate

A unit that measures profit or loss in multiples of the initial risk taken on a trade — normalizes performance across different position sizes.

Breakeven

beginner

The price at which closing your trade results in zero profit and zero loss — moving your stop here protects you from a loss.

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