Recovery Factor

Recovery factor (popularised in MetaTrader's strategy tester output) measures the relationship between cumulative profit and worst-case loss across a strategy's track record.

Formal definition: RF = |total net profit| ÷ |max drawdown|, both expressed in account currency.

Interpretation: RF = 5 means the strategy has accumulated total profits equal to 5× its worst drawdown. The higher the recovery factor, the more 'protected' future drawdowns are by accumulated profit cushion.

Practical bands for retail forex EAs: - RF < 2: thin edge; one bad regime can wipe out cumulative gains - RF 2-5: acceptable; the strategy has demonstrated profit accumulation beyond drawdowns - RF 5-10: strong; multi-year evidence of sustained edge - RF > 10: excellent; typically requires multi-year operation with stable drawdown profile

Key distinction from Calmar ratio: Calmar uses annualised return (path-independent rate), recovery factor uses total cumulative return (path-dependent amount). For a 5-year track: - A strategy with 20% annual return at 10% max DD has Calmar = 2.0 and RF ≈ 12 (because 5 years of 20% compounding ≈ 250% total return / 20% peak DD = 12.5) - Calmar normalises by time; RF rewards longer profitable operation

Limitations: RF on short tracks (under 6 months) is unreliable because both numerator and denominator have not had time to stabilise. RF on grid/martingale systems is misleadingly high because cumulative wins look strong until the rare blow-up loss invalidates the entire denominator.

For EA evaluation, RF is best combined with track length: RF = 8 on a 3-year track is stronger evidence than RF = 8 on a 6-month track.