Recovery Factor (Recovery Factor)

What is the recovery factor on ?

The recovery factor on  (Recovery Factor) - One of the important indicators of trader's trading strategy performance, calculated as the ratio of the absolute profit to the maximum drawdown. The recovery factor is usually measured in points or percentage.

This indicator gives an idea of how much the total profit of the strategy exceeds the depth of the maximum drawdown. Partially, the recovery factor indicates the reserves of the trading strategy for the resumption of positions after drawdown.

What is the recovery factor on

How is the trading strategy recovery factor calculated?

The recovery factor can be calculated in two different ways, which give two different results.

  • First way

The traditional (classic) way of calculating the recovery factor is expressed in a simple quotient - as the ratio of net profit to maximum drawdown:

Recovery Factor = net profit / maximum drawdown

  • The second way

Nevertheless, the result obtained is not objective at all, because for the total profit for the period should also be considered the total drawdown that existed in the account for the period under consideration:

Recovery Factor = net profit / total drawdown

The value of the recovery factor, calculated by the second method, provides a truly objective assessment of the stability / reliability of the trading system.

Nevertheless, at the moment, on all significant sites on the Internet, the recovery factor, including its application to PAMM accountsis calculated by the first method.

What is considered the optimal recovery factor?

The higher the recovery factor, the faster the system recovers from a drawdown. When comparing two systems, the one with the higher recovery factor will be better.

For the truly stable and reliable trading strategies, the recovery factor should be at least 15.0 (the higher the better). The index of professional trading strategy is 20 or higher.

However it should be taken into account that the Recovery Factor without reference to the testing period is not very informative. For example, a strategy yielding 15 000 points of profit for 5 years and 3000 points of drawdown (one year of continuous loss) for this period will be considered normal, while hardly anyone will risk to trade with such a system.

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