What is Sortino Ratio?
The Sortino ratio is a modification of the Sharpe ratio that evaluates risk-adjusted returns by dividing excess portfolio return solely by downside deviation, avoiding any mathematical penalty for positive upside volatility spikes.
Mathematical Calculation
Unlike standard deviation, downside deviation (sigma_downside) squares only negative returns falling below the Minimum Acceptable Return (R_MAR, typically 0%), making it the superior metric for asymmetric prop trading strategies.
Real-World Numerical Simulation
Why Breakout Traders Have Low Sharpe but High Sortino
Strategy Profile: Trend breakout trader has 9 small days (+$100 to -$150) and 1 massive +$3,500 runner day.
Sharpe Distortion: The +$3,500 outlier inflates total standard deviation, artificially depressing the Sharpe ratio to 1.15.
Sortino Accuracy: Because the +$3,500 spike is positive, downside deviation ignores it, yielding a Sortino ratio of 2.85.
Prop Firm Relevance: Prop firms only liquidate accounts on downside drawdowns (assuming consistency rules are met), making Sortino the truer survival metric.
Leader Profile Sortino Ratio & Outcome Distribution Chart
LogToLast computes your Sortino Ratio on your verified Leader Profile and visualizes your payoff asymmetry in the Backtest Lab's Outcome Distribution chart (grouping trades into Losses, Breakeven, Small, Medium, Big, and Massive Wins).
Institutional Comparison Matrix
| Metric Feature | Sortino Ratio | Sharpe Ratio |
|---|---|---|
| Denominator | Downside Deviation (Negative returns only) | Total Standard Deviation (All returns) |
| Large Winning Outliers | Rewarded (Increases numerator only) | Penalized (Inflates denominator volatility) |
| Best Suited For | Asymmetric trend & breakout traders | Mean-reversion & symmetric scalpers |
| Institutional Target | > 2.0 is Strong; > 3.0 is Elite | > 1.5 is Strong; > 2.5 is Elite |
Monitored Prop Firms Applying This Rule
Frequently Asked Questions
Stop Tracking Sortino Ratio Manually in Spreadsheets
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