What is the Sortino Ratio?

Understanding the Sortino Ratio

The Sortino ratio evaluates returns relative to downside risk only, making it a sharper tool than the Sharpe ratio for traders who care more about drawdowns than upside volatility. It divides excess return by downside deviation, rewarding strategies that earn gains with minimal pain.

Why Sortino Matters

Forex strategies often experience asymmetric returns—big winners, small losers. The Sortino ratio highlights approaches that minimize capital erosion during losing streaks while still capturing trends. Portfolio managers use it alongside profit factor and recovery factor to judge quality.

Improving Sortino

Reduce downside deviation by cutting losing trades quickly, avoiding low-liquidity sessions, and diversifying strategies. Combining Sortino analysis with risk controls keeps equity curves smoother.

Deep Dive

Most edges come from applying clear rules consistently. Expand your analysis beyond a single signal: add context from higher timeframes, recent volatility, session behavior, and catalysts. Define invalidation so a trade becomes obviously wrong fast, keeping losses small while letting winners compound.

Trader Checklist

• Higher‑timeframe bias aligns with the setup.
• Clear level or zone for entry with confluence.
• Pre‑defined stop beyond structure; 2–3R target.
• Session/liquidity supports follow‑through.
• No imminent high‑impact news unless planned.

Strategy Ideas

• Combine structure with momentum confirmation (break/close/acceptance).
• Use partials: scale out at first target; trail remainder.
• Journal results by session and pair to refine timing.

Risks and Limitations

• Thin liquidity widens spreads and distorts signals.
• False breaks around obvious levels—wait for acceptance.
• Overfitting indicators; keep the process simple and robust.

Example

Map bias on the daily chart, mark a zone, and wait on 1H for a close back above with rising participation. Enter on the retest; stop beyond the invalidation wick; target prior swing with room for extension. Record the outcome and context to iterate.