Performance & Risk Metrics
Recovery Factor
The ratio of net profit to maximum drawdown, measuring how efficiently a strategy or insider signal recovers losses relative to peak-to-trough equity decline.
Recovery Factor relates cumulative gains to the largest equity drawdown a strategy went through to earn them. A higher factor means the returns came with a shallower worst-case decline. It answers a practical question: for every unit of pain at the trough, how much profit did the strategy ultimately produce?
The arithmetic is simple. A strategy that nets 10 million in profit against a 2 million maximum drawdown has a recovery factor of 5; the same profit against a 5 million drawdown scores only 2. Because it compares absolute profit to absolute loss, it sits close to the Calmar Ratio but ignores how long the recovery took.
Formula
- \textNet Profit
- Total cumulative profit or return generated by the strategy or signal over the measurement period
- \textMaximum Drawdown
- Largest peak-to-trough percentage or absolute decline in equity value during the observation window