risk-management

Risk Management

Purpose

Define the limits that keep a losing period from becoming a terminal one, and enforce them mechanically — because the moment they matter most is the moment you will most want to override them.

When to Use

• Setting risk limits for a strategy or an account.
• In a drawdown, deciding whether to reduce size.
• Before entering a trade, checking it against the rules.
• After a loss, reviewing whether the rules were followed.

Capabilities

• Drawdown circuit breakers and de-risking schedules.
• Exposure budgets: gross, net, per sector, per correlated group.
• Correlation-aware risk aggregation.
• Stop-loss discipline and the failure modes around it.
• Pre-trade checklists as a hard gate.

Inputs

• Account equity and the current drawdown from the high-water mark.
• Open positions and their correlations.
• The proposed trade.

Outputs

• A pass/fail against each limit.
• Required size reduction, if any.
• A stated reason for a rejection.

Workflow

1. Set the limits when calm — Maximum risk per trade, maximum total exposure, maximum drawdown before de-risking. Write them down. They must be decided before they are tested.
2. Define the circuit breaker — A drawdown level at which size is cut, and a deeper level at which trading stops entirely. This is the rule that prevents a bad month from becoming a career-ending one.
3. Aggregate correlated risk — Positions in the same sector, the same factor, or the same theme are one risk. Sum them.
4. Gate every trade — Check it against the limits before entry, mechanically. A checklist that is consulted after the position is on is not a gate.
5. Honor the stop — The stop is the risk. Moving it further away after entry converts a defined loss into an undefined one, and it is the single most common way accounts are destroyed.
6. Review the rule, not the outcome — A trade that followed the rules and lost was a good trade. A trade that broke the rules and won was a bad one, and it will be repeated.