Blog
Only the returns below the target (red) enter the downside deviation; winners, however large, are ignored.
Blog
Two traders both close the quarter at +7%. The first gets there with steady gains and a worst week of −1.2%. The second spends a month at −15% before a lucky run fishes him out. Same return, very different skill, and the metric built to tell them apart is the Sortino ratio. Unlike standard volatility measures, it punishes only the risk you actually fear: the downside.
In short: the Sortino ratio is (mean return minus target) divided by the downside deviation, that is the volatility of only the returns below the target (usually 0%). Wins, however large, are ignored. The most common mistake is dividing by the number of losing trades instead of the whole series: that inflates the deviation and crashes the ratio. Above 1 (annualised) is solid, above 2 is strong.
The Sortino ratio has three ingredients:
Sortino = (R − T) ÷ DD Return above the target, divided by how violently you fell below it
The numerator is the return above the target; the denominator is how violently you fell below that target along the way. The asymmetry is the whole point: an unusual week at +8% raises standard deviation (and lowers your Sharpe), but here it does not count against you, and rightly so.
Numbers make it concrete. Take a series of ten closed trades, returns as a percentage of the account, target T = 0%.
Only the returns below the target (red) enter the downside deviation; winners, however large, are ignored.
Now the calculation, in four steps:
1. Mean return: the ten returns sum to +7.0%, so R = 7.0 / 10 = 0.70% per trade. 2. Shortfalls below target: four trades closed below 0%: −1.0, −2.5, −0.5 and −3.0. Their squared values are 1.00, 6.25, 0.25 and 9.00, total 16.5. 3. Downside deviation: divide by ALL ten trades, not just the four losers: DD = √(16.5 / 10) = √1.65 ≈ 1.28%. 4. Sortino: (0.70 − 0) / 1.28 ≈ 0.55.
Step 3 is where almost everyone slips: dividing by the number of losing trades (4) instead of the whole series (10). That inflates the downside deviation to √(16.5 / 4) ≈ 2.03 and crashes the ratio to 0.34, a wrong number that would make you distrust a perfectly acceptable strategy. The denominator must be total N: the quiet trades are part of the risk picture too.
Below 1, the strategy earns its returns with more downside pain than ideal: in this series, trades 5 and 9 do almost all the damage. Cut the size on those two setups and the same gross return would push Sortino above 1 without touching the winners. A convention note: platforms often annualise the ratio (multiplying by the square root of the number of periods in a year), so a 0.55 per trade is not comparable with a 1.8 annualised. Always compare like with like.
The Sharpe ratio divides by total volatility, so it punishes your best weeks exactly like your worst. For asymmetric styles (trend following, breakout trading, any approach that cuts losses short and lets profits run) this systematically understates skill. Sortino fixes the asymmetry by ignoring upside deviation entirely. If your equity line is jagged on the way up but controlled on the way down, Sortino is the honest grade.
The usual reading: above 1 is solid, above 2 is strong, above 3 is exceptional, on annualised values. For prop firm traders the ratio has a second job: challenges punish drawdown, not volatility, so a strategy with a high Sortino (small, rare shortfalls) is structurally better suited to pass than one with the same return but a high Sharpe and deeper falls.
Working the calculation by hand once is the best way to really understand what the number says about your trading. Redoing it after every session is wasted time. AlgoTech connects to your MetaTrader 5, MetaTrader 4 or cTrader account in read only mode (encrypted credentials, no orders, no fund movements) and recomputes Sortino, alongside Sharpe, Calmar, max drawdown and expectancy, on every imported trade, with the correct denominator and annualisation already handled. Each account lives in a separate environment with its own history, so the ratio is read on the right sample.
Common questions about the Sortino ratio.
The Sortino ratio rewards exactly what matters to anyone risking real capital: returns earned without violent falls. Working it by hand once teaches you to read it; the correct denominator (total N) and consistent annualisation are the two details that separate a useful number from a misleading one.
This article is for informational purposes only and does not constitute financial advice. The numerical examples are illustrative. Algotech Srl is not a financial intermediary.