Sortino Ratio
A Sortino ratio above 2.0 is considered good for active traders.
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The Formula
Sortino Ratio = (Mean Return - Risk-Free Rate) / Downside Deviation Similar to the Sharpe ratio but uses only downside deviation instead of total standard deviation. This means large winning trades do not penalize your score.
Benchmark Ranges
| Level | Range | What It Means |
|---|---|---|
| Poor | Below 1.0 | Downside risk outweighs excess returns |
| Average | 1.0 - 2.0 | Acceptable downside-adjusted performance |
| Good | 2.0 - 3.0 | Strong returns relative to downside risk |
| Excellent | Above 3.0 | Exceptional downside risk management |
How to Track
Calculate your periodic returns (daily or weekly) over at least 30 periods.
Isolate only the returns that fall below your target return (usually 0 or the risk-free rate).
Calculate the standard deviation of only those negative returns — this is your downside deviation.
Divide excess return by downside deviation to get your Sortino ratio.
How to Improve
Focus on eliminating large losing days rather than trying to increase winning days.
Use stop losses consistently to cap downside per trade.
Reduce position size during high-volatility periods to limit drawdown risk.
Why the Sortino Ratio Matters
The Sortino ratio addresses the biggest flaw of the Sharpe ratio: treating all volatility as bad. For traders, upside volatility is desirable. A day when you make 5% should not be penalized the same as a day when you lose 5%.
By focusing only on downside deviation, the Sortino ratio provides a more accurate picture of risk-adjusted returns for strategies with asymmetric payoff profiles, which includes most active trading strategies.
Understanding Downside Deviation
Downside deviation is calculated the same way as standard deviation, but only using returns that fall below a minimum acceptable return (MAR). The MAR is typically set to 0 or the risk-free rate.
If your daily returns over a month are: +1%, -0.5%, +2%, -1%, +0.3%, -0.8%, +1.5%…
Only the negative returns (-0.5%, -1%, -0.8%) are used in the downside deviation calculation. This gives a true picture of how much pain your strategy inflicts on bad days.
Sortino vs Sharpe: A Practical Comparison
Consider two traders:
Trader A: Average daily return of 0.3%, total standard deviation 1.2%, downside deviation 0.6%
- Sharpe: 0.25 daily (3.97 annualized)
- Sortino: 0.50 daily (7.94 annualized)
Trader B: Average daily return of 0.3%, total standard deviation 0.5%, downside deviation 0.4%
- Sharpe: 0.60 daily (9.52 annualized)
- Sortino: 0.75 daily (11.9 annualized)
Trader A has more volatility, but much of it is on the upside. The Sortino ratio reveals that Trader A’s downside risk management is better than the Sharpe ratio suggests. Trader B is still superior on both measures but the gap narrows when using the Sortino.
Using the Sortino Ratio in Your Journal
The Sortino ratio works best as a longitudinal metric. Track it monthly and look for trends:
- A declining Sortino ratio suggests your losing days are getting worse relative to your winning days
- A rising Sortino ratio indicates improving risk management
- Compare Sortino ratios across strategies to determine which produces the best risk-adjusted returns
JournalPlus calculates both Sharpe and Sortino ratios automatically, giving you a complete picture of your risk-adjusted performance without manual spreadsheet work.
Common Mistakes
Confusing the Sortino ratio with the Sharpe ratio — they use different denominators.
Setting the target return too high, which distorts the downside deviation calculation.
Using too few data points for reliable downside deviation estimation.
Frequently Asked Questions
Why is the Sortino ratio better than the Sharpe ratio for traders?
The Sortino ratio only penalizes downside volatility, making it fairer for traders with occasional large winners. The Sharpe ratio penalizes all volatility equally, even profitable volatility.
What Sortino ratio should I target?
Aim for a Sortino ratio above 2.0. Above 3.0 is excellent and indicates your strategy generates strong returns with well-controlled downside risk.
Can the Sortino ratio be gamed?
Like any metric, it can be misleading over short periods. A strategy that takes small profits and avoids small losses will show a high Sortino until a large unexpected loss occurs.
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