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Recovery factor

Recovery factor is your net P&L divided by your maximum drawdown. It answers a question neither figure asks alone: how many times over did I win back my worst dip? A recovery factor of 3 means the period's gain is worth three times the worst trough endured to get it.

The formula

Net P&L ÷ max drawdown.

How to read it

How much you earn per unit of worst drawdown endured. Above 3, your system absorbs its bad runs well.

Below 1, your total gain is smaller than your worst dip: the strategy has not yet shown it can climb back what it takes down, and a repeat of that trough would erase everything. Above 3, it has real margin. It is the figure that says whether a return is sustainable or was wrenched out.

The classic mistake

Reading it over a period with no serious drawdown. If your worst trough is tiny because the period was calm, the ratio explodes and stops measuring anything. A very high recovery factor over three months of a favourable market says nothing about the next losing run.

To go deeper on this : read the full guide. Every term is gathered in the glossary.