Who this is for — Anyone who wants to understand not only how much a method earns, but how well it recovers from its worst phases.
The recovery factor is net profit divided by max-drawdown. It measures recovery efficiency relative to the maximum damage suffered.
In plain terms — It shows how many times net profits "repay" the worst drop in the equity curve.
Bronze prerequisite — Before this lesson: drawdown, risk-per-trade, risk-reward-ratio, r-multiple. See bronze-path.
How to read it with other metrics
Recovery factor is useful when contextualised:
- With profit-factor to understand profit/loss flow quality.
- With expectancy to assess average trade.
- With the length of the period analysed.
A high value over a few months may be random. A stable value across several market cycles is far more meaningful.
Example — Annual net profit €30,000, max drawdown €10,000: recovery factor 3. If the following year stays near 3 in different contexts, the strategy shows good resilience.
Distortions to avoid
- Ignoring a recent drawdown not yet recovered.
- Calculating on gross figures without real costs.
- Making decisions from a single year.
- Using the figure without checking market regime.
Card
- What it is: net profit divided by max drawdown.
- Why it matters: estimates historical recovery capacity.
- Healthy use: multi-period comparisons, not a single snapshot.
Silver path — Module: Operational metrics. Part of silver-path.