Sortino Ratio
A risk-adjusted return metric that only penalizes downside volatility, not upside swings.
Formula
More Details
What is the Sortino Ratio?
The Sortino Ratio, created by Frank Sortino and Robert van der Meer, is an improvement on the Sharpe Ratio. The key difference: it only penalizes downside volatility.
Think about it — if you have a day where you make $5,000 instead of your usual $500, the Sharpe Ratio actually views that as "more volatile" and penalizes your score. That's counter-intuitive. As a trader, you want big winning days. The Sortino Ratio fixes this by only looking at the bad kind of volatility: losing days.
Formula
Sortino Ratio = Mean Daily P&L / Downside Deviation
Where Downside Deviation is calculated as:
DD = √( (1/n) × Σ min(daily_pnl, 0)² )
In plain English: take only the negative daily returns, square them, average them, and take the square root. Positive days are ignored entirely.
Interpretation
| Sortino Ratio | Meaning |
|---|---|
| < 0 | Losing money on average |
| 0 – 1.0 | Marginal risk-adjusted returns |
| 1.0 – 2.0 | Good — losses are well-controlled |
| 2.0 – 3.0 | Excellent — strong edge with limited downside |
| > 3.0 | Outstanding |
The Sortino Ratio is always higher than or equal to the Sharpe Ratio for the same data set (assuming you have any positive days at all), because the downside deviation is smaller than or equal to the total standard deviation.
Sharpe vs Sortino: When Does It Matter?
| Scenario | Sharpe | Sortino | Takeaway |
|---|---|---|---|
| Symmetric returns | 1.5 | 1.8 | Similar — either works |
| Big occasional wins | 0.8 | 2.1 | Sortino is much fairer |
| Consistent small gains, rare big losses | 1.2 | 0.9 | Sortino reveals the hidden tail risk |
If your Sortino is much higher than your Sharpe, your strategy has positive skew (occasional large wins) — the Sharpe was under-rating you.
If your Sortino is lower than expected relative to Sharpe, you may have negative skew (rare large losses) — a warning sign.
A Practical Example
- Daily P&L series over 20 days: [+200, -50, +300, -100, +150, +400, -80, +100, -200, +250, +180, -30, +500, -60, +220, +90, -150, +350, +100, -40]
- Mean daily P&L = $116.50
- Downside deviation (from the 7 losing days) = $104.19
- Sortino = 116.50 / 104.19 = 1.12
- Compare: Sharpe for same data ≈ 0.69
The Sortino gives a much better picture here because this trader has several outsized winning days that inflate the total standard deviation without representing real risk.
How TradesViz Calculates It
TradesViz groups your realized P&L by calendar date, isolates the negative daily returns, computes the downside deviation, and divides the mean daily P&L by it. This is done on real, after-commission data.
How TradesViz Does It Better
- Displayed alongside Sharpe and Calmar for instant comparison
- Filter by setups, tags, or symbols to see which strategies have the best downside risk profile
- Sortino > Sharpe gap quickly tells you if your strategy has favorable positive skew
- Available as a custom dashboard widget for at-a-glance monitoring
Where to find it in TradesViz
Example
A trader averaging $116/day with downside deviation of $104 has a Sortino of 1.12 — better than their Sharpe of 0.69 thanks to positive skew.