Performance Metric
Recovery Factor — Definition & Example
Net profit divided by max drawdown — how efficiently a strategy recovers from worst losses.
Recovery factor measures how much profit a strategy generates per unit of worst-case drawdown experienced. A recovery factor of 3.0 means net profit is 3x the max drawdown — robust. Below 1.0 means the strategy has not yet generated enough profit to justify the worst-case pain it inflicts; this often happens early in a strategy's life or when drawdown is unusually severe.
Formula
Recovery Factor = Net Profit / Max DrawdownExample
Strategy generated ₹1,50,000 net profit with a max drawdown of ₹30,000. Recovery factor = 1,50,000 / 30,000 = 5.0. For every ₹1 of worst-case drawdown, the strategy has produced ₹5 of net profit.
Related
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