Define numerator and denominator
Here we use net profit from closed trades divided by their maximum absolute drawdown in the same currency and period. Other reports may include open-position equity. Values based on different definitions are not directly interchangeable.
Calculate from the complete sequence
Our eight synthetic NQ trades produce USD 110 net. Closed-trade equity first reaches USD 10,285 and later falls to USD 10,110: a maximum decline of USD 175. Recovery factor is 110 / 175 ≈ 0.629.
The number does not mean that the drawdown has already been recovered. This sequence ends below its previous high. Time to recovery is not part of this formula either.
Keep edge cases explicit
With no measured drawdown, there is no finite quotient. Negative net profit produces a negative ratio despite the positive implication of the word recovery. Do not replace these cases with an invented ideal value.
Add duration and path
Do not compare a short quiet period with several years of changing market conditions. Add the longest time below the previous peak, intraday risk and the number of independent decisions. A high ratio alone establishes neither a safe strategy nor a future return.
Recovery factor = net profit / maximum absolute drawdown
A reproducible example
| Measure | Before costs | After costs |
|---|---|---|
| Sum of winning trades (USD) | 550.00 | 530.00 |
| Absolute sum of losing trades (USD) | 400.00 | 420.00 |
| Balance: wins minus losses (USD) | 150.00 | 110.00 |
| Profit Factor | 1.375 | 1.262 |
USD 550 in wins − USD 400 in losses = USD 150 balance before costs. After 8 × USD 5 in costs, USD 110 remains. Net profit factor first deducts costs from each trade: 530 / 420 ≈ 1.262.
- Balance before costs
- 150.00 USD
- Total costs
- 40.00 USD
- Balance after costs
- 110.00 USD
- Profit factor after costs
- 1.26
- Expectancy per trade
- 13.75 USD
- Max. drawdown
- 175.00 USD
Equity after closed trades; synthetic starting equity: USD 10,000.
| Trade | Equity (USD) | Drawdown (USD) |
|---|---|---|
| 0 | 10,000.00 | 0.00 |
| 1 | 10,145.00 | 0.00 |
| 2 | 10,040.00 | 105.00 |
| 3 | 10,285.00 | 0.00 |
| 4 | 10,130.00 | 155.00 |
| 5 | 10,175.00 | 110.00 |
| 6 | 10,120.00 | 165.00 |
| 7 | 10,215.00 | 70.00 |
| 8 | 10,110.00 | 175.00 |