Every algo trading strategy will eventually face a drawdown. It is a mathematical certainty. The difference between a professional and an amateur is how they handle it.

The Recovery Trap

The math of percentage loss is non-linear and brutal.

This is why Capital Preservation is rule #1. If you lose 50% of your account, you are effectively out of the game.

The Martingale Fallacy

"If I lose, I'll double my bet size to win it back."

This strategy (Martingale) guarantees bankruptcy. In algo trading, streaks of 5-10 losses happen. If you double 10 times, your position size becomes 1024x your starting size. No margin account can sustain that.

The Solution: Kelly Criterion

The Kelly Criterion is a formula used by gamblers and quants to determine the optimal bet size.

f = (bp - q) / b
Where b is odds received, p is probability of winning, q is probability of losing.

In practice, full Kelly is too volatile. Most hedge funds use "Half-Kelly" – betting half of what the formula suggests. This smooths out the equity curve and strictly limits drawdown.