What is the Sortino Ratio?
Quick Answer: The Sortino ratio measures returns relative to downside deviation only, rewarding strategies that deliver gains while minimizing harmful drawdowns.
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.
Benchmarking
A Sortino ratio above 2 is considered strong. Track it monthly to ensure strategy tweaks improve downside efficiency rather than just chasing headline returns.
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.
Data Quality
Sortino ratios built on limited samples or unrealistically smooth backtests are misleading. Use clean data and include transaction costs to keep metrics honest.
Related Terms
Learn More About Forex Trading
Now that you understand sortino ratio, explore our comprehensive guides: