Recovery Factor

Recovery factor is a performance ratio that divides net profit over a period by the maximum drawdown suffered during that same period. It answers a question a profit figure alone cannot: how much pain was endured to produce the gain. A strategy that earns twice its worst drawdown scores 2, while one that earns the same amount after a drawdown of equal size scores 1. Because it puts return and worst-case decline in the same number, recovery factor is widely used to compare backtests and track records that have different absolute returns. It shares the limitations of any drawdown-based metric: it depends on the sample period and on how the drawdown was measured.