Recovery factor in gold trading

Recovery factor is the net profit of a strategy over a period divided by its maximum drawdown in the same currency. A recovery factor of 3 means the strategy made three times its worst decline. It is reported by the MT5 strategy tester and is a quick measure of reward against pain.

How it applies to gold trading

Gold strategies often have long quiet stretches and sharp drawdowns around events such as FOMC days or geopolitical shocks. Two systems that both made $10,000 can feel completely different if one fell $2,000 along the way and the other $8,000. Recovery factor captures that difference, and a higher number generally means a smoother ride and less temptation to abandon the system.

The figure depends on the test length: a longer period usually raises net profit faster than drawdown, so compare strategies over the same span. It also says nothing about how long the recovery took, which a look at the equity curve shows.

Worked example

Example (hypothetical numbers): Strategy A made $12,000 with a maximum drawdown of $3,000, a recovery factor of 4.0. Strategy B made $15,000 with a $7,500 drawdown, a factor of 2.0. B earned more, but A earned more per unit of pain and would allow larger size for the same drawdown limit.

A common mistake

Comparing a recovery factor from a two-year backtest with one from a six-month live record. Use the same period length and the same cost assumptions.

See also: Drawdown, Equity curve, Profit factor, Sharpe ratio.

Frequently asked questions