Drawdown
Drawdown matters more than volatility because it captures the actual experience of losing money. A 30% drawdown requires a 43% gain to recover; a 50% drawdown requires a 100% gain. The math of recovery makes deep drawdowns very expensive even when the eventual gains "average out."
Most traders quit during deep drawdowns, which makes drawdown depth a behavioral constraint as much as a financial one. Quarter-Kelly position sizing typically caps drawdown around 20-25% in expectation; full Kelly produces drawdowns of 40-60% that most traders cannot psychologically endure.
Tracking drawdown by playbook reveals which setups carry hidden tail risk. A playbook with great average expectancy but a 60% drawdown in its worst sequence is too dangerous to size up; the same expectancy with a 20% drawdown is a candidate for serious size allocation.
How PerpLog uses Drawdown
PerpLog tracks current drawdown, max drawdown, and projects expected drawdown via Monte Carlo simulation (1000 simulations × 100 trades). The Adaptive Sizing engine includes a drawdown-constrained Kelly cap that reduces sizing when historical drawdown approaches the trader's tolerance.
Related reading
- Kelly Criterion for Crypto Trading: A Practical Approach — Blog
- Why Every Trader Needs a Trading Journal (And How to Keep One) — Blog
Browse all terms in the trading glossary.