What is recovery factor in trading?
In one line: Recovery factor is a strategy's net result divided by its max drawdown. It shows how much a method gained in a test compared with its worst drop along the way.
The formula
Recovery factor = net result ÷ max drawdown
Use the same units for both. Units of risk (R) work well, because the answer then fits any account size.
A simple example
Two practice tests, each 100 trades:
| Test | Net result | Max drawdown | Recovery factor |
|---|---|---|---|
| A | +20R | 10R | 20 ÷ 10 = 2.0 |
| B | +20R | 20R | 20 ÷ 20 = 1.0 |
Same end result. But Test B had to sit through a dip twice as deep to get there. Test A covered more ground per bad stretch. A math example, not a promise.
If a test ends below zero, recovery factor is negative. The method didn't climb out of its holes.
Why it matters
Net result alone hides the ride. Recovery factor puts the worst stretch right next to it.
- A higher number means the drops were small compared with the gains in that test.
- A number near or below 1 means the worst dip was about as big as everything gained.
It pairs well with Expectancy (the average per trade) and Profit factor (wins compared with losses).
A common mistake
Comparing tests of very different lengths. A longer test usually gains more and has more time to hit a deep dip. A 1,000-trade test and a 50-trade test aren't a fair match. Compare tests with similar sample sizes.
The other mix-up: a single high number from a short test. One lucky stretch can make it look great. See how to backtest a trading strategy.
Work out recovery factor from your journal every 100 trades. If it keeps dropping, your drawdowns are growing faster than your results.
For a version that uses yearly returns, see the Calmar ratio.
Questions
What is a good recovery factor?
Higher is better, and it depends on how long the test ran. Above 1 means the net result was bigger than the worst drop. Past numbers don't guarantee future ones.
How is recovery factor different from the Calmar ratio?
Recovery factor uses the total net result. The Calmar ratio uses the average yearly return. Both divide by max drawdown.
Where do I find recovery factor?
Some testing platforms show it in their reports. You can also work it out from your journal: total R divided by your largest drop in R.
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