Profit Factor and Recovery Factor

This is Geko.

In backtest data there is an item called “Profit Factor (PF)”.

Profit Factor represents “Total Profit” divided by “Total Loss,” and if it exceeds 1, it means profits remained over the test period.

Now,

“Is a larger Profit Factor an indicator of a better EA?”

the answer isn’t that simple.

Profit Factor is simply a comparison of “profit” and “loss” calculated from the test results, and it does not take into account risks that may have appeared during the test period.

For example, suppose you start trading with an initial capital of 100,000 yen.

1) If total profit is 150,000 yen and total loss is 100,000 yen,

net profit is 50,000 yen and the Profit Factor is 1.5.

2) If total profit is 200,000 yen and total loss is 100,000 yen,

net profit is 100,000 yen and the Profit Factor is 2.0.

Now, suppose the maximum drawdown is

1) 10,000 yen

2) 100,000 yen

in that case, the risk level of EA operation changes greatly.

Maximum drawdown represents the maximum loss at any moment during the measurement period, and

in case 1) the damage is small, but in case 2) recovery may take a long time.

The ratio of this “maximum drawdown (risk)” to “net profit (return)” is called the “Recovery Factor” or “Risk-Return Rate.”

If the measurement period is 10 years, net profit is 100,000 yen, and maximum drawdown is 50,000 yen,

the Recovery Factor will be 2.0, and it would be expected to recover from losses in 10 ÷ 2 = 5 years,

and if the measurement period is 10 years, net profit is 100,000 yen, and maximum drawdown is 10,000 yen,

the Recovery Factor will be 10.0, and it would be expected to recover from losses in 10 ÷ 10 = 1 year.

Recovery Factor is not an item in backtest data, but it can be calculated easily, so please check it.

It serves as a practical guideline for risk management when actually operating the EA.