What Is a Recovery Factor

The two figures and the one that comes out

The recovery factor is a ratio of two numbers from a trading record. The net profit over a period, after every loss and every cost; and the maximum drawdown — the deepest fall from a high point during that same period. Divide the first by the second and the answer is the factor. In example figures an account made 3,000 dollars in a year and, on the way, was at worst 1,000 below a high it had reached: a factor of 3. The same profit with a deepest fall of 3,000 would be a factor of 1; with a fall of 500, a factor of 6. The profit says what was made. The factor says what it cost on the way.

A pile of sand and the hole it came from

Picture a beach with a pile of sand and the hole the sand came from. The pile is the net profit; the hole is the deepest fall the account took on the way to it. The recovery factor is the pile measured in holes: three holes' worth of sand in this pile, a factor of 3. A big pile from a small hole is one kind of year, and the same pile from a hole as deep as the pile is tall is another kind, with a factor of 1. The pile alone does not tell them apart. The hole does, and the factor is the pile and the hole read together, which is why it is on the report at all.

This paper is locked