Recovery Factor and Why It Matters in Backtesting
Recovery factor measures how quickly your strategy recovers from drawdowns. Learn this key backtesting metric. Score a strategy properly: net profit against.
What Is Recovery Factor?
Recovery factor = net profit / maximum drawdown. If your strategy makes $10,000 with a maximum drawdown of $2,000, the recovery factor is 5. The higher the recovery factor, the more efficiently the strategy uses risk to generate returns.
Interpreting Recovery Factor
- Below 2: Poor — drawdowns are too large relative to returns
- 2-5: Acceptable — reasonable risk-adjusted performance
- 5-10: Good — efficient strategy with controlled drawdowns
- Above 10: Excellent — but check for curve-fitting
Using Recovery Factor in Backtesting
Compare recovery factor across strategies, not in isolation. A strategy with 50% annual return and 25% drawdown (RF=2) is worse than one with 30% return and 5% drawdown (RF=6). Recovery factor rewards smooth equity curves over high returns with deep drawdowns.
Disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 70-80% of retail investor accounts lose money when trading CFDs. Backtesting does not guarantee future results. Always consider whether you can afford the potential loss of your capital.