You can't just pick a "reasonable-sounding" number as your return threshold. Academically, there's a fairly clear direction: use the expected return of your comparison benchmark as the threshold, rather than arbitrarily choosing 0% or some round number. If you use Omega to compare two strategies, the threshold should be the return of the same benchmark for both — not different thresholds for each — otherwise the comparison is meaningless.
A leading global cryptocurrency platform,suitable for both beginners and experienced traders.
New user benefit: 20% off trading fees upon registration!！
Why the threshold can't be set arbitrarily
The Omega ratio is defined as: total gains above the threshold ÷ total losses below the threshold. The structure of this formula makes the threshold central to the entire calculation. If the threshold is set low, almost all positive returns count in the numerator, while only a few losses go into the denominator — Omega will be high. If the threshold is set high, the numerator shrinks and the denominator grows — Omega will fall. The same strategy can see its Omega go from 1.8 to 0.6 just by changing the threshold.
So if you use different thresholds when comparing two strategies, you're not really comparing how good the strategies are — you're comparing how lenient the two thresholds are. A strategy with a lower threshold naturally has an advantage. That's not a meaningful comparison.
Where should the threshold be set when comparing strategies?
An academic paper specifically discussing the consistency between Omega and stochastic dominance offers a practical suggestion: the threshold should be set to the expected return of a benchmark, just as the risk-free rate is typically used as the benchmark in the Sharpe ratio. The paper also mentions that when an Omega value falls below 1, it should be discarded — similar to how a negative Sharpe ratio is meaningless.
The practical implication is this: if you're comparing two crypto strategies, the threshold could be the return of holding Bitcoin over the same period, or the return of holding ETH over the same period, depending on where you would actually put your money if you didn't choose the strategy. If you're comparing an active strategy against passive holding, setting the threshold to the passive holding's return tells you whether the active strategy's gains from outperforming the passive benchmark are greater than its losses from underperforming it.
A description of an Omega indicator on TradingView points in a similar direction: long-term investors can set an annual target around 10% (the historical market average), then check whether Omega consistently stays above 1. That 10% is an example anchor, not a fixed standard. Your threshold should correspond to your own alternative option.
A mathematical limitation to keep in mind
A research paper on commodity portfolios encountered a practical issue when setting thresholds: ex-post portfolio returns could never exceed the threshold. They therefore capped the threshold at the historical highest return of the asset with the lowest average return in that asset class. This limitation applies to strategy comparison as well. If you set the threshold higher than the strategy's highest single-period return in the sample, the numerator becomes zero and Omega becomes 0 or impossible to calculate.
When comparing two strategies, the threshold must be below the returns of both strategies for at least part of the sample period; otherwise one strategy's Omega will lose meaning. A safer approach is to avoid setting the threshold too far above the lower average return of the two strategies.
My take
When comparing two strategies, use the same threshold — the return of your comparison benchmark. If you're comparing two active strategies, the benchmark could be the Bitcoin return over the same period, or the return of the passive strategy you would otherwise invest in. If you just want to see whether a strategy is "worth doing," set the threshold to the actual return of where your money would go if you skipped the strategy — for example, the annualized yield of stablecoins in Earn, or the return of simply holding ETH.
Don't use 0% as the default threshold. 0% means you treat "not losing money" as the benchmark, but in crypto markets, holding stablecoins or major coins already carries an opportunity cost. Using 0% as the threshold will systematically inflate Omega, because it conflates "beating zero" with "beating the alternative option."
If you see an Omega value for a strategy, first ask what the threshold was. An Omega of 1.5 calculated with a 0% threshold is not the same as a 1.5 calculated with BTC's return over the same period as the threshold. The former may just mean "better than not losing money," while the latter means "better than holding BTC."
A leading global cryptocurrency platform,suitable for both beginners and experienced traders.
New user benefit: 20% off trading fees upon registration!！
References
- TradingView·Omega Ratio Analysis, accessed: 2026-10-23
- ScienceDirect·Risk aversion vs. the Omega ratio: Consistency results, accessed: 2026-10-23
- Econstor·The Sortino ratio and the Omega ratio, accessed: 2026-10-23
- Journal of Economics and Financial Sciences·Omega ratio fund ranking study, accessed: 2026-10-23
- EcoCyb·Using the Omega Ratio for Optimal Asset Allocation in Commodities, accessed: 2026-10-23
