Sortino Ratio in Forex
A clear definition of Sortino Ratio, with practical context for reading markets and making better trading decisions.
Definition
The Sortino Ratio is a performance measure that compares excess return with downside deviation, focusing on harmful volatility rather than all volatility.
Difference from Sharpe
The Sharpe Ratio uses total standard deviation, so strong upside moves also increase its volatility measure. The Sortino Ratio instead focuses on returns falling below a chosen target or minimum acceptable return.
Why It Can Be Useful
For strategies with asymmetric returns, the Sortino Ratio can provide a clearer view of downside efficiency. Like all ratios, it depends on the selected period, return data, and assumptions.
Key Takeaway
Sortino Ratio measures return relative to downside risk. It is especially useful when upside and downside volatility should not be treated as equally undesirable.
Practical forex example
Why Sortino Ratio matters
Understanding Sortino Ratio helps traders interpret market information, plan decisions, and manage risk with more context.
Related forex terms
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