Drawdown and Recovery factor
Drawdown is what can kill you (literally, in propfirms). Recovery factor tells you whether the reward compensates.
The essentials
- Max Drawdown: the largest drop in USD or % from an equity peak.
- In propfirms the max MDD allowed is usually 5–10% of the initial balance.
- Recovery factor RF = Total_P&L ÷ MDD. RF>3 = very good system.
Max Drawdown (MDD)
- The largest drop in USD or % from a previous peak of your equity to the next trough.
- Computed on cumulative equity, not on close-balance.
- In propfirms the max MDD allowed is usually 5–10% over the initial balance. If you exceed it, fail.
- Practical question: "could I psychologically take that drawdown again?". If the answer is no, lower the risk.
Recovery Factor
RF = Total_P&L ÷ MDDQuick readings
- RF < 1 — you made less than your worst drop. Bad risk/reward ratio.
- RF = 1–3 — acceptable.
- RF > 3 — very good system.
- RF > 10 — exceptional or very short sample.
Drawdown duration
How long you take to recover the previous peak. A small MDD that lasts 6 months is psychologically devastating. Look at the equity curve to see whether your DDs are fast or slow.
Related
Sharpe and average R:R
Sharpe tells you whether your returns compensate the volatility. R:R tells you whether your system needs to hit a lot or a little to be profitable.
Portfolio Health Score
0–100 index summarizing your portfolio's overall health. Designed to glance at and know whether your situation is healthy or critical.
Risk per trade
Amount in USD (or %) you risk on a single trade. The most important money-management metric and the most abused by inconsistent traders.