PAMM-account: The recovery factor
One of the most important indicators of the reliability of the trading system used on a PAMM account is the recovery factor. Accordingly, investors should pay close attention to this indicator when choosing a PAMM account. The recovery factor shows how quickly the system restores its profitability after drawdowns. Mathematically, this is the ratio of the account’s yield to its maximum drawdown. in other words, this parameter shows how many times the current yield of a PAMM account is greater than its maximum historical drawdown.
The beauty of the recovery factor is that this indicator allows you to combine such criteria for evaluating the attractiveness of a PAMM account as profitability and possible drawdowns. It often happens that you look at the account and see a yield of several thousand percent. And then you look at the historical drawdown and realize that the drawdown of 80-90% is unlikely to suit you. You go to the next account and go through a bunch of PAMM accounts. As a result, the head is spinning and it is completely unclear which Manager to give preference to in terms of the ratio of return / drawdown. But if you sort PAMM accounts in the rating by such criteria as the recovery factor, you can rank them in terms of the reliability of the trading system used. For reliability, you can sort invoices for several time intervals: six months, a year, and for the entire lifetime of the account. It doesn’t make much sense to consider shorter time intervals, since investing in a PAMM account with a life span of less than six months is quite an adventurous event. In this case, the recovery factor may appear in a very distorted form due to insufficient statistical sampling, since the account has not yet fallen into the normal drawdown for it, and just by a happy coincidence.
Naturally, the recovery factor is not an exhaustive criterion when choosing a PAMM account. You also need to consider the risks, the age of the account and other parameters. It should be remembered that the recovery factor shows the degree of reliability of the system, but it does not say anything about the ability of the account Manager to manage capital. It can also happen that a PAMM account has a great recovery factor, a great return of thousands or even tens of thousands of percent, but the drawdown on it was 95%. How justified would it be to invest in such an account? As one of the components of the investment portfolio, which is not very sorry to lose, it will be a good choice. But all your money to invest in such a PAMM account will be very risky, because the knowledge of money management in the Manager of this account is very doubtful. Perhaps the Manager knows what capital management is and deliberately takes this risk in order to get as much profit as possible. But even in this case, investing in such an aggressive account will be no less risky.
Thus, we can draw the following conclusion: the recovery factor is certainly not a sufficient criterion for selecting a PAMM account to invest in. But the necessary criterion for evaluating the reliability of the trading system, it is undoubtedly.