<p><strong>Recovery Factor</strong> is a risk‑adjusted performance metric calculated as the net profit of a trading strategy divided by its <a href="/NewSite/encyclopedia/max-drawdown/" class="ency-link">maximum drawdown</a>. It quantifies how much profit is generated for each unit of peak‑to‑trough loss, offering a straightforward way to compare strategies that differ in volatility and risk exposure.</p>

<p>A higher Recovery Factor indicates that a strategy recovers losses quickly and earns more profit relative to its worst‑case decline, making it attractive to risk‑conscious investors. For example, a strategy with $200,000 net profit and a $50,000 maximum drawdown yields a Recovery Factor of 4, suggesting it earns four dollars of profit for every dollar of drawdown suffered.</p>