What Is the Sortino Ratio? Sharpe, but Only Punishing Losses

The Sortino ratio is a close cousin of the Sharpe ratio. Both divide your return by a measure of volatility — but Sortino uses downside deviation only, counting just the trades that went against you and ignoring the size of your winners.

Sortino ≈ average return ÷ downside deviation

Why it exists

Sharpe has a quirk: it treats a +6R winner as "volatility" and dings your score for it, the same as it would a −6R loss. But upside swings are not the risk you worry about. Sortino fixes this by measuring only harmful, below-target volatility — so a system with explosive winners and controlled losers is rewarded, not penalised.

A worked example

A system with a few large winners and small, tightly controlled losses may post a mediocre Sharpe because those big winners inflate total volatility. Its Sortino is much higher, because the downside — the only part that actually hurts — is small. The two numbers together tell you where your volatility lives.

How to use it

• Best for asymmetric systems — trend-following and "let winners run" styles usually look better on Sortino than Sharpe.
• Higher is better — more reward per unit of downside risk.
• Use both — a high Sortino but low Sharpe means big upside swings; a low Sortino means your losing trades are too volatile, which often traces back to position sizing or stop discipline.