(Also see my advice on requesting recommendation letters, and Shriram Krishnamurthi's advice to graduate school recommendation letter writers.)
At the beginning of the letter, say how well you know the person, for how long, and how you became acquainted. Also give an overview or summary of your recommendation.
Be specific. Don't just praise the person with generalities (such as “quick learner”), but give specific stories or anecdotes about things the person did to give you that impression. A letter that praises a person without being concrete comes across as a tepid recommendation. Rankings in class are another example of a helpful specific.
Differentiate. Say how this person is unlike other people: his or her specific strengths.
Compare. When writing to someone who shares context with you, name names. (“In the top 5% of the class” is OK, but much better is “Equivalent in promise to my former students Donny Knuth and Al Turing, but a notch below Johnny von Neumann.”)
Be plausible. Don't make the person out to be perfect. Often a letter just ignores shortcomings, but then the letter lacks credibility; writing such letters will hurt people you recommend in the future. If the person has shortcomings, admit them or note some ways the person can improve, particularly if the person has started to overcome those problems. Don't make up faults nor magnify real ones.
State your own qualifications. How many other people have you seen who are of the caliber expected by the reader? (For a recommedation to a top-10 school such as UW, the recommendation will carry more weight if the recommender has spent time at a top-10 school. Only someone with first-hand experience can give a truly accurate assessment.) These qualifications are probably best-suited to a postscript, though sometimes they are written as the first paragraph to establish credibility.
Justify your recommendations. Don't write a statement like "The applicant is definitely qualified for your institution/award/program" (especially with "your institution" verbatim as in a form letter, not substituted by an actual name). This weakens rather than strengthens the letter, because the reader will assume that the form letter was sent to many places, and the statement cannot be true of every recipient.
Don't be too brief. One paragraph, or two short paragraphs, is the kiss of death. (If you don't know the student well, and don't have much to say, add a short paragraph explaining what the course is and why it's good that the student excelled in it. This won't fool most people, but will soften the blow of a short letter.) However, don't ramble: make it succinct and to the point. Whoever reads your letter is probably reading hundreds of other letters. If the key points of yours do not pop out, or the reader wearies midway through your letter, then your letter will net be effective.
For situations where the letter has a disproportionate impact (e.g., for faculty applications), or if you are new to recommendation-writing, treat your letter like any other important piece of writing: get feedback from others.
If you are requested to provide a letter in PDF, provide the original PDF that was created by your word processor or typesetting program. Don't scan the document, which makes it much harder to read. No one really cares whether your signature is on the letter, so you can have just a typewritten signature; alternately, you can insert a PDF signature. You don't want eyestrain (or anything else) to lessen the impact of your letter. For similar reasons, don't use "watermark" letterhead that puts a large, dim image (for example, of your university crest or logo) behind your text. You may think this looks cool and sets your letter or institution apart, but in fact it makes your letter harder to read without impressing anyone.
(The Mayfield Handbook is compilation of suggestions and style tips useful for all types of writing. The following is from its “Writing Letters of Recommendation” section.)
Write letters of recommendation to provide relevant information and to present an individual truthfully and positively.
Before writing the letter:
Writing the letter:
Here is a real example of a letter of recommendation that I received for a PhD applicant. An eminent faculty member sent this in response to my request for more information, because the first letter had been content-free. You can see that this letter, though positive on its face, violates nearly every rule about writing a recommendation letter. It saddens me that lack of thoughtfulness on the part of the advisor meant that we had to reject the student's application (though it's possible that the advisor truly thought the student was unworthy and was signaling this obliquely via the letter).
Dear Prof. Ernst: It is my pleasure to write this letter and recommend [omitted], one of my favorite students, for the admission to the Co-PhD Study Program at your laboratory. [omitted] is an enthusiastic and progressive young man with extremely high potentialities. He is not only quick at learning and good at solving complicated problems, but also with a logical and creative mind that enables him to raise some insightful views. I was also deeply impressed with his diligence and outstanding communication ability, compared with my other students. What's more, he is an optimistic man with pleasant personality, and gets along well with all the people around him. I hope he could further broaden his vision and accumulate research and programming experience to get him more fruitful. I believe in your laboratory, which possesses a wonderful research foundation for program analysis and software security, his excellent competence, coupled with your preeminent guidance, will assure him of academic achievements in his future academic pursuits. Thanks for your letter, if you have any other questions, please contact me freely. [Signature]
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