Sortino Ratio
Also known as: downside-adjusted Sharpe, Sortino
The Sortino ratio is a refinement of the Sharpe ratio that uses only downside deviation in the denominator, so upside volatility no longer counts against the strategy and the metric reflects what most traders actually care about: how rough the bad days are.
The Sharpe ratio penalizes a strategy for any volatility, including the upside that traders want. Sortino fixes that by replacing the standard deviation of all returns with the standard deviation of only the returns below a target (usually zero, sometimes the risk-free rate). The result is a number that says: per unit of downside pain, how much excess return did this strategy deliver?
Sortino is particularly useful for strategies with positive skew. A trend-follower with many small losses and rare big winners may look mediocre by Sharpe but excellent by Sortino, because the big winners contribute to total volatility but not to downside volatility. For the same reason Sortino is a more honest yardstick for option-selling strategies, which look great by Sharpe right up until they aren't.
Sortino is most informative read alongside Sharpe rather than instead of it. A Sortino noticeably higher than Sharpe tells the trader the strategy's volatility is mostly to the upside; the two numbers close together suggest a symmetric return distribution.
(annualized return − risk-free rate) ÷ annualized downside deviation, where downside deviation counts only returns below the target.
Reported alongside Sharpe on the Key Metrics dashboard widget; a meaningful Sharpe-to-Sortino gap surfaces as a positive skew signal.
Related terms
Upload a broker statement and Gecko names this pattern in your data, in dollars, alongside 11 other behavioral axes. First 100 trades free.
Read my trades free