Recovery Factor
A measure of how efficiently a strategy recovers from its drawdowns, relative to net profit.
Recovery factor divides a strategy's net profit by its maximum drawdown. It answers a practical question: for every dollar of the worst drawdown this strategy has experienced, how many dollars of net profit has it produced over the full test period?
Recovery Factor = Net Profit ÷ Maximum Drawdown
A strategy that produced $4,380 in net profit against a maximum drawdown of $1,000 has a recovery factor of 4.38 — it has historically generated more than four times its worst drawdown in total profit.
Why it matters
A high recovery factor suggests a strategy doesn't just perform well on average, but that its worst periods have historically been followed by strong enough recoveries to justify holding through them. It's a useful complement to Sharpe and Sortino ratios, which measure volatility rather than recovery.