Recovery Factor
Also known as: recovery ratio
The recovery factor is net profit divided by maximum drawdown over the same period, expressing how many drawdown-equivalents of profit a strategy has produced and answering the practical question of whether the trader has been paid for the pain.
Recovery factor is the cousin of Calmar that uses absolute net profit rather than annualized return. The two answer slightly different questions: Calmar is the per-year return per unit of drawdown; recovery factor is the cumulative profit per unit of drawdown over the whole sample.
Recovery factor is most useful as a sanity check on long-running strategies. A recovery factor of 3 means the strategy has earned three drawdown-equivalents of profit since inception — comforting, because even a repeat of the worst drawdown leaves the trader well in the green. A recovery factor below 1 means the strategy has not yet earned back the worst pain it has inflicted, which is a fragile place to be regardless of the headline P&L.
Where Calmar can flatter a strategy by being averaged across a long window, recovery factor punishes a strategy whose biggest drawdown is recent. That is exactly the right behavior: a fresh drawdown deserves more weight than one the trader has already lived through.
Cumulative net profit ÷ maximum drawdown over the evaluation window.
Surfaced alongside Calmar on the Key Metrics dashboard widget; plotted as a small inset on the equity curve.
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