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The Sortino ratio divides return above a target by downside deviation, so large winning periods are not counted as risk. This article walks through the formula on six months of journal data, shows how the most common calculation mistake nearly triples the result, and compares three strategies with the same average return that Sharpe and Sortino rank differently.
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The Sortino ratio divides return above a target by downside deviation, so large winning periods are not counted as risk. This article walks through the formula on six months of journal data, shows how the most common calculation mistake nearly triples the result, and compares three strategies with the same average return that Sharpe and Sortino rank differently.
The Sharpe ratio measures return per unit of risk, but calculating it correctly requires periodic returns, the right risk-free rate, and proper annualizing. This article walks through the formula, a worked example from a trading journal, and what the ratio misses.
Maximum consecutive losses counts the longest unbroken run of losing trades, not the money lost. FTMO Academy simulations and CME Group's risk management course, both fetched directly, show how likely long streaks really are and how position sizing decides whether one is survivable.
Slippage and commissions are real costs that sit outside the gross result a broker statement shows on a single trade. How to log expected versus filled price and commission on both legs, roll them into a net cost per trade, and see what skipping this does to your win rate, profit factor, and R-multiple.
Average win/loss ratio, also called payoff ratio, compares the average size of your winning trades to the average size of your losing trades after the fact. A worked example, a breakeven win rate table, and a clear comparison against risk-reward ratio and R-multiple, two metrics it often gets confused with.
Profit factor is gross profit divided by gross loss. Here is the exact step-by-step process for calculating it correctly from your own trading journal data, with a worked example and the mistakes that quietly skew the number.
A trader can win 70 percent of trades and still lose money. R-multiple, which measures each trade's result against the risk taken, is what turns win rate into a number that actually predicts profitability.
Percent-based position sizing, stops placed at invalidation, correlated positions treated as one risk, and conservative sizing relative to a real sample: the rules that hold regardless of strategy.
Win rate, profit factor, expectancy, and drawdown each answer a different question about a strategy. Reading only one, especially win rate, is how a losing strategy can look fine for months.
