Recovery factor = total net profit / absolute value of max drawdown. A strategy that nets $20,000 with a $5,000 max drawdown has a recovery factor of 4.0.
It answers the question a prop firm's risk desk actually cares about: when this strategy is in drawdown, how aggressively does it dig itself out? A high recovery factor means the equity curve climbs through prior peaks quickly; a low one means each drawdown takes months to recover.
Typical ranges: above 3.0 is generally considered tradeable; above 5.0 starts getting attention from allocators; above 10.0 is rare and usually fragile (often achieved on a small sample where the worst drawdown simply hasn't happened yet).
Recovery factor is closely related to Calmar but conceptually different. Calmar is annualized return per unit of drawdown — a risk-adjusted speed measure. Recovery factor is total return per unit of drawdown — a cumulative payoff measure. Both reward strategies that compound without deep equity holes, but recovery factor scales with the length of the track record while Calmar normalizes for time.