Sharpe vs Sortino Ratio: Risk-Adjusted Performance for Traders
Understand Sharpe and Sortino ratios in plain English. Know when each fits your strategy and how to compare systems with risk-adjusted results.
What the Sharpe and Sortino Ratios Measure
Risk-adjusted performance asks a simple question: how much return did you earn for the risk you took? The Sharpe and Sortino ratios are two common ways to answer this.
The Sharpe ratio compares your return over a cash-like baseline to your overall volatility. Volatility means how widely your returns swing, up or down. A strategy that earns steady gains with small swings will generally show a higher Sharpe than one with the same return but choppy results.
The Sortino ratio focuses only on downside volatility. Downside volatility means harmful swings below your target or baseline. Sortino ignores big positive jumps and penalizes only damaging moves. As a result, strategies with lumpy upside but controlled pullbacks can look better on Sortino than on Sharpe.
For beginners: think of Sharpe as “return per total rockiness,” and Sortino as “return per bad-rockiness.” Both summarize consistency, but they care about different types of noise.
When to Use Sharpe vs Sortino
- Sharpe is useful when you want an all-in view of consistency. If your goal is a smooth equity curve day to day, and both upside and downside bumps matter (for example, intraday scalping with frequent trades), Sharpe captures that total ride quality.
- Sortino is useful when upside bursts are acceptable but drawdowns are not. If you run a swing trend strategy that grinds sideways and occasionally jumps higher, Sortino won’t punish the upside jumps, but it will penalize sharp pullbacks and gap-downs.
Examples:
- Mean reversion intraday: Many small wins and losses, frequent noise. Sharpe can be helpful because it counts all wiggles.
- Breakout swing trades: Quiet periods followed by big winners. Sortino can better reflect the idea that upside spikes aren’t a problem if downside is contained.
- Overnight risk strategies: Exposure to gap-downs matters. Sortino highlights whether downside shocks dominate your risk.
Neither metric is “better.” Pick the one that matches what you actually care about: total smoothness (Sharpe) or protection from harmful dips (Sortino).
Interpreting the Numbers
Use these ratios to compare strategies on the same market, timeframe, and sample period. Avoid comparing across very different conditions, because volatility and opportunity sets can vary widely.
| Metric | Penalizes | Best for | Watch-outs |
|---|---|---|---|
| Sharpe | All volatility (up and down) | Day traders seeking overall smoothness | Can undervalue strategies with lumpy upside |
| Sortino | Downside volatility only | Swing/trend systems tolerating big upside | May look flattering if upside is very spiky |
- Higher is generally better when you compare apples to apples.
- Sample size matters: a handful of trades can distort both ratios.
- Outliers and regime shifts can sway results; check multiple periods.
- Complement, don’t replace: also review drawdown, win/loss distribution, and execution realism.
How to Apply in Practice
- Define what you value: total smoothness (Sharpe) or downside control (Sortino).
- Fix your test scope: market, timeframe, and date range.
- Collect a sufficient number of trades under realistic rules.
- Calculate both ratios and compare strategies under identical conditions.
- Cross-check with max drawdown and a quick equity-curve review.
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