Recovery factor answers a blunt question: for all the pain this system put you through, how much did it actually pay you? Take the net profit and divide it by the deepest drawdown along the way. A recovery factor of 4 means the strategy earned back its worst dip four times over. It rewards profit and punishes deep holes, which makes it a quick sniff test for whether a return was worth the risk it took to get there.
What it is
Recovery factor is net profit divided by maximum drawdown. Net profit is what the account made over the period, after costs. Maximum drawdown is the largest peak-to-trough fall in equity along the way — the worst the account felt at any point, not where it finished. Dividing one by the other tells you how many times over the system clawed back its deepest loss.
- Below 1 — the strategy hasn't yet earned a sum equal to its worst drawdown.
- 2 to 3 — a respectable return for the risk taken.
- Above 5 — strong, provided it rests on enough trades and a real equity drawdown.
How it works
Recovery factor = net profit ÷ maximum drawdown
It is a close cousin of the Calmar ratio, which does the same division but annualises the return and usually works in percentage drawdown. Recovery factor is the plain, unannualised version: profit over the period, divided by the worst equity fall in that same period. Because it isn't annualised, always check the window. A recovery factor of 6 over three years and one of 6 over three months are not the same achievement.
A worked example
An EA runs for a year on a £10,000 account and finishes £6,000 up. Along the way its equity peaked, then fell £1,500 before recovering — that is its maximum drawdown.
Recovery factor = £6,000 ÷ £1,500 = 4.0
So the system earned back its worst dip four times over across the year. Compare it with a second EA that also made £6,000, but suffered a £3,000 drawdown to do it. Its recovery factor is 6,000 ÷ 3,000 = 2.0. Same profit, half the recovery factor, because it hurt twice as much to get there. If you had to run one of them with real money, the first is the calmer ride for the same reward.
Why it matters, and the drawdown trap
The whole figure hinges on the drawdown you divide by, and that is exactly where it gets gamed. A too-small drawdown basis inflates the number.
- It must use equity-based drawdown — the real peak-to-trough fall in account equity, floating losses included.
- Closed-trade drawdown flatters. Ignoring open positions hides the pain of a grid that sat £4,000 underwater before closing green. Divide by that soft number and the recovery factor looks wonderful right up until the account blows.
- A short, quiet window that never met a real drawdown produces a huge figure from a tiny denominator. That is a small sample, not skill.
Common misconceptions
- Higher isn't always better. A sky-high figure usually means the sample is too short to have hit its worst drawdown yet.
- It says nothing about time. Two systems with the same recovery factor can take very different lengths of time, and numbers of trades, to get there.
- It's not a win rate. A system can post a fine recovery factor and still lose most of its individual trades.
- One outlier can lift it. A single huge win raises net profit while leaving the drawdown untouched. Strip the outlier and re-check whether the ratio survives.
The Karnek note
Karnek computes recovery factor from your live terminal using equity-based drawdown — the real peak-to-trough fall, floating losses included — on the same trades and window as the net profit shown beside it, so the two reconcile. That drawdown is the part most often gamed, so it is read straight from the terminal rather than a closed-trade export. Karnek is read-only and can never trade the account.
Written and reviewed by the Karnek Research team. Last updated August 2026.
Educational content only - not financial advice. Past performance does not predict future results. Trading carries significant risk.