Omega Ratio

Quality of returns compounds; the Omega Ratio tells you whether gains above your hurdle outpace misses below it.

Instead of averaging returns or assuming a normal distribution, Omega evaluates the entire return distribution relative to a user-defined target return per bar. For each bar, it counts how much you beat the target (excess gains) and how much you fell short (shortfalls). Over a rolling window, Omega = Σ(excess gains) / Σ(shortfalls).

• Intuition: An Omega of 1.0 means gains above your hurdle roughly match the losses below it (breakeven quality). > 1.5 suggests favorable conditions; > 2.0 signals strong quality. < 1.0 means setbacks dominate.

• Why Omega vs. Sharpe/Sortino? Omega uses all moments of the distribution around a user-chosen threshold (not just mean and variance), making it robust when returns are skewed or heavy-tailed—and directly aligned to your objective (e.g., “beat 0.05% per bar”).

• Target choice matters: On Daily charts, typical per-bar targets range from 0.00% to 0.10%; intraday usually needs smaller targets. Higher targets demand more edge and will reduce Omega; lower targets do the opposite.

• Log vs. linear: Choose log returns for large moves/cross-asset comparability; linear is fine for small, steady bars. Use Omega as a quality gate: require Omega > 1 (or > 1.5) before deploying capital, then layer your usual entries/exits.