A trader runs a system with a 40% peak-to-trough drawdown. They assume recovery is just 40% away. It isn't. A 40% loss requires a 66.7% gain to break even. If the system averages 20% annual returns, that drawdown alone costs over three years of profitable trading — assuming nothing goes wrong again during the climb back.

The recovery factor measures how efficiently a strategy claws back losses. The formula is simple: divide net profit by maximum drawdown. A recovery factor of 3.0 means the system earned three dollars for every dollar lost in its worst drawdown. Below 1.0, the strategy hasn't even covered its own worst-case damage.

CONCEPTRecovery Factor = Net Profit ÷ Max Drawdown — higher is structurally stronger.
WARNINGA 50% drawdown demands a 100% return just to restore starting equity — the math is ruthless.
KEY IDEATime to recovery compounds the damage — capital locked in recovery isn't compounding forward.

The asymmetry of losses is the mechanical reason recovery hurts so badly. A 10% drawdown needs 11.1% to recover. A 25% drawdown needs 33.3%. A 50% drawdown needs exactly 100%. Each incremental loss percentage demands a disproportionately larger gain. This is not opinion — it is arithmetic derived directly from the properties of percentage change on a shrinking base.

10% 20% 30% 40% 50% 60% Drawdown 0% 50% 100% 150% Recovery Needed Actual recovery Linear (myth)

Algorithmic traders typically benchmark a recovery factor above 2.0 as minimally acceptable, with robust systems targeting 3.0 or higher. Position sizing rules directly control this metric — reducing size during drawdown periods lowers the denominator by preventing compounded losses. Maximum drawdown and risk of ruin mathematics underpin why these thresholds exist. Some systematic traders also monitor the Calmar ratio, which divides annualised return by maximum drawdown — structurally similar logic, applied across time.

Capital in recovery is capital not compounding. Every percentage point saved from a drawdown is worth more than the same percentage earned on a healthy account.

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