The Sortino ratio is preferable to the Sharpe ratio for evaluating asymmetric trading strategies because it only penalizes the negative volatility of returns. Understanding this distinction, and knowing when to use Sharpe, Sortino, or Calmar, separates traders who validate their strategies correctly from those who publish a flattering backtest without grasping its true risk profile.
Why performance ratios are essential
The limits of profit factor alone
Profit factor (total gains divided by total losses) is one of the most-checked metrics in a backtest report. A profit factor of 1.8 sounds solid. But this figure says nothing about consistency of gains or the drawdown periods a trader must endure to achieve that result.
Two strategies can display the exact same profit factor of 1.8: the first with steady gains and contained losses, the second with a few very large winners offsetting long losing streaks. Only the first is genuinely tradeable in live conditions. Risk-adjusted ratios identify this distinction immediately.
For a deeper look at complementary metrics, see our complete guide on expectancy and profit factor in backtesting.
Return without risk: a misleading concept
A strategy generating 20% annual returns looks attractive. But if it endures a 40% drawdown to get there, the trader will experience losses twice the size of the final gain before reaching the target. This distortion is exactly what performance ratios correct by factoring risk into the equation.
74 to 89% of retail accounts lose money
According to ESMA (European Securities and Markets Authority), between 74 and 89% of retail accounts lose money trading CFDs, with average losses ranging from €1,600 to €29,000 per client. The vast majority of these traders do not measure the real risk of their strategy before deploying it live.
Sharpe ratio: the universal benchmark
Formula and step-by-step calculation
The Sharpe ratio measures a strategy's excess return over the risk-free rate, divided by the standard deviation of its returns. Formula:
Sharpe = (Average strategy return - Risk-free rate) / Standard deviation of returns
In trading practice, the risk-free rate is often set to 0% (a common simplification) or to the short-term government bond rate (T-Bills in the US, OAT in France).
Concrete example: a strategy generates 18% annual return with a monthly return standard deviation of 12%. Risk-free rate set at 2%.
Sharpe = (18% - 2%) / 12% = 1.33
Target values: good above 1, excellent above 2
According to Corporate Finance Institute, the accepted international benchmarks are:
| Sharpe Ratio | Interpretation | Practical application |
|---|---|---|
| Below 1 | Insufficient | Risk too high relative to return |
| 1.0 to 1.99 | Good | Acceptable for a personal trading account |
| 2.0 to 2.99 | Very good | Solid strategy, serious candidate for prop firm |
| Above 3 | Excellent | Hedge fund level, rare in retail trading |
For strategies targeting prop firms (FTMO, MFF, Topstep), a Sharpe above 1.5 is a reasonable minimum. See our guide on backtesting and prop firm rules for complete criteria.
Limitations: positive volatility penalized
The main flaw of the Sharpe ratio is that it penalizes all volatility, including large winning days. If your strategy occasionally produces exceptionally profitable trades, the standard deviation increases and the Sharpe decreases, even though these swings favor the trader.
This is precisely why the Sortino ratio was developed as a more relevant alternative for asymmetric trading strategies.
Sortino ratio: fixing the Sharpe's bias
Only negative volatility (downside)
The Sortino ratio uses only the standard deviation of negative returns (downside deviation) in its denominator, excluding positive returns. Formula:
Sortino = (Average return - Risk-free rate) / Standard deviation of negative returns
With this formula, a strategy that occasionally generates large upsides will not be penalized for those gains. Only loss periods factor into the risk calculation.
When to use Sortino instead of Sharpe
Sortino is recommended in three typical cases:
How to interpret the Sortino vs Sharpe gap
If your Sortino ratio is significantly higher than your Sharpe (for example Sortino 2.4 vs Sharpe 1.2), that is a positive signal: your strategy generates primarily upside volatility. This profile is ideal for live trading or prop firm use.
For a deeper look at risk management in your backtests, see our guide on risk-reward ratio optimization.
Calmar ratio: drawdown over return
Formula: CAGR / Max Drawdown
The Calmar ratio measures the compound annual growth rate (CAGR) divided by the maximum absolute drawdown observed over the backtest period. Formula:
Calmar = CAGR / |Max Drawdown|
Example: a strategy generates a CAGR of 30% with a max drawdown of 12%.
Calmar = 30% / 12% = 2.5
The interpretation is direct: how many years of nominal performance does it take to cover the worst loss observed? A Calmar of 2.5 means the strategy earns in one year 2.5 times its historical worst drawdown.
Ideal for comparing prop firm strategies
The Calmar ratio is the most relevant metric for prop firm challenge candidates, because these programs evaluate precisely the drawdown-to-return relationship. FTMO imposes a maximum drawdown of 10% (total loss) and 5% per day on its 2-Step challenge.
In this context, a Calmar above 2 indicates the strategy earns in one year twice its maximum drawdown, giving a comfortable safety margin against prop firm limits. A Calmar above 3 is considered excellent and significantly reduces the risk of hitting prop firm thresholds.
Quick decision rule for prop firms
Calmar between 1 and 2: acceptable but risky for a prop firm challenge. Calmar between 2 and 3: good fit for prop firm criteria. Calmar above 3: optimal profile for maximizing validation chances.
See our guide on prop firm trading strategies to structure your approach further.
Comparison table and practical cases
Strategy A vs B: same profit, different ratios
The table below illustrates two strategies with the same annual return of 24%, but radically different risk profiles:
| Metric | Strategy A | Strategy B |
|---|---|---|
| Annual return (CAGR) | 24% | 24% |
| Max Drawdown | 8% | 22% |
| Return standard deviation | 9% | 18% |
| Downside deviation | 4% | 16% |
| Sharpe ratio | 2.44 | 1.22 |
| Sortino ratio | 5.50 | 1.37 |
| Calmar ratio | 3.00 | 1.09 |
Strategy A is clearly superior on all risk-adjusted metrics despite identical gross returns. Strategy B requires enduring a 22% drawdown in hopes of 24% gain: a proposition that is psychologically unsustainable and incompatible with standard prop firm rules.
Combined reading: Sharpe + Sortino + Calmar
The three ratios are complementary and should be read in sequence:
Start with Sharpe
Compare with Sortino
Validate with Calmar
Flag strategies to rework
For further validation of your backtests, see our guides on walk-forward testing and optimization and avoiding overfitting.
Important Risk Warning
Conclusion
The Sharpe, Sortino, and Calmar ratios are three complementary measurement tools that provide a complete picture of a strategy's risk-return profile. Sharpe gives the overall view, Sortino corrects the bias that penalizes asymmetric profits, and Calmar directly links returns to the worst observed loss. Used together, they filter out flattering backtests from genuinely solid strategies. Backtrex automatically calculates all three ratios for every backtest you run on the platform, giving you an instant read on your strategy's real quality. Check pricing to start backtesting today.
The Sharpe ratio divides excess return by the standard deviation of all returns (positive and negative). The Sortino ratio divides that same excess return by the standard deviation of negative returns only (downside deviation). The result: Sortino does not penalize sequences of large gains, unlike Sharpe. For asymmetric strategies with occasional large winners (trend following, breakout, SMC), Sortino is more representative of actual risk.
A Calmar above 2 is considered solid for a prop firm strategy: it means the strategy earns in one year twice its historical worst drawdown. With FTMO rules (10% maximum drawdown), a Calmar of 2 implies a CAGR of at least 20%, comfortably covering profit targets while staying within drawdown limits. A Calmar above 3 provides an even more comfortable safety margin.
Formula: Sharpe = (Average return - Risk-free rate) / Standard deviation of returns. For trading, the risk-free rate is often simplified to 0% or set to the 3-month T-bill rate (around 4-5% in 2026). Standard deviation is calculated from returns over the chosen period (daily, weekly, or monthly). Backtrex calculates this ratio automatically in every backtest report, so no manual calculation is needed.
Most prop firms directly evaluate maximum drawdown and daily drawdown, which correspond to the denominator of the Calmar ratio. They therefore implicitly favor strategies with a high Calmar. In practice, optimizing your Calmar (reducing max drawdown for a given return) is the top priority for passing a prop firm challenge.
Three main levers: first, reduce position sizing to lower return volatility. Second, filter out low-quality setups to improve consistency of gains. Third, diversify across multiple pairs or markets to smooth the return curve. In backtesting, avoid mechanically optimizing the Sharpe at the expense of real robustness, which creates a risk of overfitting on parameters.
No. Sharpe remains the universal benchmark because it is computable and comparable across all asset classes. Sortino is numerically higher than Sharpe only when the strategy shows significant return asymmetry (rare but large gains). For scalping or mean-reversion strategies with symmetric returns, both ratios produce very similar results.