Sortino Ratio
In one line: It tells you if the reward was worth the scary drops (not the happy jumps).
Explain it like I'm 5
Imagine two kids on a trampoline, both trying to end up higher than where they started.
- Ava bounces up gently, over and over. She never falls, she just keeps rising a little each time.
- Ben ends up just as high as Ava, but along the way he sometimes shoots way up (yay!) and sometimes crashes down hard on his bottom (ouch!). Those hard landings hurt.
They jump on average though at the same height. The Sortino ratio only cares about the ouch moments — the hard landings. It doesn't punish Ben for flying up high, only for slamming down. So Ava still scores better, because she never crashed.
This is the big difference from the Sharpe ratio: the Sharpe ratio counts every big bounce as risky, even the good ones. The Sortino ratio says, "going up isn't scary — only going down is."
What it actually measures
The Sortino ratio answers: were the returns big enough to justify the painful drops?
It takes your return, subtracts the risk-free rate (what a savings account or short-term government bond would pay), and then divides by the downside deviation — how much your returns bounced around below your target, ignoring the upside entirely.
The formula
Sortino ratio = (Portfolio return − Risk-free rate) / Downside deviation
- Portfolio return — what you actually made over the period.
- Risk-free rate — the boring, near-guaranteed return you could have had instead.
- Downside deviation — like standard deviation, but only the returns that fell below your target (usually zero or the risk-free rate). Good days don't count against you.
A quick example
Your account returns 12% over a year. A risk-free bond would have paid 2%. Looking only at your losing months, the downside deviation works out to 5%.
Sortino = (12% − 2%) / 5% = 2.0
Compare that to the Sharpe ratio for the same account, which might be 1.25 — lower, because the Sharpe ratio also penalised the big winning months.
What is a "good" Sortino ratio?
Rough rules of thumb for an annual Sortino ratio:
| Sortino ratio | Read as |
|---|---|
| Below 1 | The drops aren't paying you back |
| 1 – 2 | Solid |
| 2 – 3 | Very good |
| Above 3 | Excellent (and rare — double-check your data) |
Sortino ratios usually come out higher than the Sharpe ratio for the same strategy, because they ignore upside swings. Only compare Sortino to Sortino.
Why traders care
Most traders don't lie awake worrying about their account going up too fast. They worry about drawdowns. The Sortino ratio measures exactly the thing that hurts — downside risk — so it often lines up better with how a strategy actually feels to trade.
A strategy that grinds out small steady gains and occasionally rockets higher looks mediocre on Sharpe but great on Sortino. That's the Sortino ratio doing its job.
Watch-outs
- It needs enough losing periods to measure downside deviation. Very few losses = an unstable (or infinite) number.
- Like the Sharpe ratio, a handful of trades won't give a reliable reading.
- Different tools use different targets (zero vs. the risk-free rate). Check what the target is before comparing numbers from two sources.
See your own Sortino ratio
TradeNoter calculates the Sortino ratio on your real trade history automatically, next to your Sharpe ratio, win rate, expectancy, and drawdown — so you can see whether your gains came with real pain or a smooth ride.