Recovery factor

The recovery factor is calculated as the total net profit of a trading system divided by its maximum drawdown. A higher recovery factor indicates a more efficient recovery process. For example, a system with a $1,000 net profit and a $200 maximum drawdown has a recovery factor of 5. This metric helps evaluate a system's resilience and its capacity to generate profits relative to its largest capital reduction.

For a retail trader, a high recovery factor suggests a system that effectively manages losses and returns to profitability. However, this metric does not account for the time taken to recover. A system might have a high recovery factor but take an extended period to overcome a drawdown, tying up capital. Traders should consider this alongside other risk metrics like drawdown duration and risk-reward ratio to assess overall system performance.