2/13 - Important recovery factors for EA
EA developer Reiwa's double-E is here.
It appears in MT5 backtests,
but not in MT4 backtests,
about an important indicator“Recovery Factor”.
Today, I would like to make an article about it.
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【About Recovery Factor】
It is also called the risk-reward ratio,
to put it simply,
the net profit divided by the maximum drawdown.
If net profit is 1,000,000 yen and maximum drawdown is 50,000 yen,
the Recovery Factor is 20.
The unit is “times”; in this case it is 20 times.
The higher this Recovery Factor, the more excellent the EA.
Also, this Recovery Factor depends on how long the backtest period is.
If the maximum drawdown is not updated and the EA shows a rising curve,
the longer the period, the more net profit increases,
and the Recovery Factor becomes higher.
That said,
even if a high Recovery Factor is achieved in a backtest of less than 10 years,
it does not necessarily imply it will work long-term.
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【What is the standard for an excellent EA?】
So,
how long a Recovery Factor should be to be considered excellent?
however
“A Recovery Factor of 10 or more over 10 years”is the guideline.
This means,
in 10 years, net profit equals 10 times the maximum drawdown.
In other words, simply calculated, 1x per year,
if the maximum drawdown occurs,
net profit for one year would be needed to recover,
to read it that way.
“…Huh, that sounds quite long, doesn’t it?”
Some readers may think so.
But that is the reality.
Even an excellent EA takes that long,, meaning so.
Operations should be viewed with a long-term perspective!
Of course, if you build a portfolio,
the risks complement each other,
and the Recovery Factor increases.
Even if one EA falls into a severe drawdown,
the others are unlikely to be in the same degree of drawdown.
A portfolio should be constructed to complement each other’s risks.
See you again!
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【Reiwa’s Double-Eye EA Listing】
https://www.gogojungle.co.jp/users/112481/products
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【Reiwa’s Double-Eye Serialization Articles】
■EA for Beginners
https://www.gogojungle.co.jp/finance/navi/series/1700
■No Nonsense! Gogojungle Problem Posing!
https://www.gogojungle.co.jp/finance/navi/series/1701
■Double-Eye FX Musings
https://www.gogojungle.co.jp/finance/navi/series/610
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【Reiwa’s Double-Eye’s Beliefs】
Develop EA with a straightforward approach and,
gain the support of more people,
maintain a long-term WIN-WIN relationship,
aim to revitalize the EA market and improve literacy.
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