Risk Management Rules

Risk management rules govern how your strategy allocates capital, limits exposure, and protects your account from catastrophic losses. While entry and exit rules determine when to trade, risk management rules determine how much to trade and when to stop trading altogether. These rules operate at the portfolio level, sitting above individual trades to enforce discipline across your entire strategy.

How Risk Rules Interact with Strategy Execution

Risk management rules are evaluated at two critical points in the strategy execution pipeline:

• Before entry. Position sizing rules calculate the appropriate lot size for a new trade based on your account balance, the stop loss distance, and your risk parameters. Other risk rules (such as Max Open Trades or Max Daily Loss) determine whether a new entry is permitted at all.
• During a trade. Portfolio-level rules such as Max Drawdown Limit and Equity Curve Trading continuously monitor your account and can halt all trading activity if thresholds are breached.

Risk rules take precedence over all other rule types. Even if your entry conditions are perfect and all filters pass, a risk rule can prevent the trade from being placed if the portfolio-level constraints are not satisfied.

Position Sizing

Overview

The Position Sizing rule calculates the number of lots or units to trade on each entry based on your account equity and risk tolerance. Proper position sizing ensures that no single trade can cause disproportionate damage to your account, regardless of the outcome. Arconomy supports several position sizing methods, from simple fixed-lot sizing to sophisticated risk-based calculations.

Key Parameters

Parameter	Description	Default	Range
Method	Fixed Lots, Fixed Percentage Risk, Fixed Dollar Risk, or Kelly Criterion	Fixed Percentage Risk	—
Risk Per Trade	Percentage of account equity risked per trade (for percentage-based methods)	1.0%	0.1% – 10.0%
Fixed Lot Size	Static lot size for every trade (for Fixed Lots method)	0.1	0.01 – 100
Max Lot Size	Maximum lot size cap regardless of the calculated position size	10.0	0.01 – 1000
Equity Basis	Use Account Balance, Account Equity (including open P&L), or Free Margin	Account Balance	—
Round To	Round the calculated lot size to the nearest increment (e.g., 0.01 lots)	0.01	—

Typical Use Case

The Fixed Percentage Risk method is the most widely recommended approach. With a 1% risk per trade, the position size is automatically calculated based on the distance to your stop loss. If the stop loss is tight, the position will be larger; if the stop is wide, the position will be smaller. This ensures consistent risk exposure regardless of the trade's characteristics or the instrument's volatility.

Risk Rule: Position Sizing
  Method: Fixed Percentage Risk
  Risk Per Trade: 1.0%
  Max Lot Size: 5.0
  Equity Basis: Account Balance
  Round To: 0.01 lots

  Example Calculation:
  Account Balance: $10,000
  Risk Per Trade: 1% = $100
  Stop Loss: 50 pips = $5.00/pip (for EUR/USD standard lot)
  Position Size: $100 / (50 * $5.00) = 0.40 lots

Max Open Trades

Overview

The Max Open Trades rule limits the number of simultaneous positions your strategy can hold. This prevents over-exposure during periods of high signal frequency and ensures your account can withstand the worst-case scenario where all open positions move against you simultaneously.

Key Parameters

Parameter	Description	Default	Range
Max Positions	Maximum number of open positions allowed at any time	3	1 – 50
Per Symbol	Apply the limit per symbol or across all symbols in the strategy	Total	—
Per Direction	Apply the limit per direction (long/short) or across both directions	Total	—
Queue Behaviour	When the limit is reached: Reject new entries, Queue them, or Close the oldest position	Reject	—

Typical Use Case

For a multi-symbol strategy trading 10 forex pairs with 1% risk per trade, setting Max Open Trades to 5 ensures that your maximum total exposure at any point is 5% of your account. This leaves sufficient margin for adverse movements and prevents the strategy from becoming over-concentrated during periods where many pairs signal simultaneously.

Max Daily Loss

Overview

The Max Daily Loss rule halts all trading activity for the remainder of the trading day once cumulative losses exceed a specified threshold. This circuit breaker prevents a string of losing trades from compounding into a significant daily drawdown. Once triggered, no new entries are allowed until the next trading day begins.

Key Parameters

Parameter	Description	Default	Range
Loss Threshold	Maximum cumulative loss for the day before trading is halted	3.0%	0.5% – 20.0%
Threshold Type	Percentage of account balance, or fixed currency amount	Percentage	—
Include Open P&L	Count unrealised P&L from open positions toward the daily loss	Yes	—
Reset Time	The time at which the daily loss counter resets	00:00 Server	—
Close Open Positions	Optionally close all open positions when the threshold is hit	No	—

Typical Use Case

A Max Daily Loss of 3% is a commonly used threshold for intraday strategies. If you are risking 1% per trade, this allows for three consecutive full losses before halting. For strategies with higher trade frequency, a tighter threshold of 2% may be appropriate to prevent rapid equity erosion during adverse conditions.

Risk Rule: Max Daily Loss
  Threshold: 3.0%
  Type: Percentage of Balance
  Include Open P&L: Yes
  Reset: 00:00 Server Time
  Close Positions: No

Max Drawdown Limit

Overview

The Max Drawdown Limit rule monitors the peak-to-trough decline in your account equity and halts all trading if the drawdown exceeds a specified level. Unlike the Max Daily Loss which resets each day, the drawdown limit operates continuously and only resets when equity reaches a new high water mark. This is the ultimate safety net for your account.

Key Parameters

Parameter	Description	Default	Range
Max Drawdown	Maximum allowable decline from the equity high water mark	10.0%	1.0% – 50.0%
Drawdown Type	Percentage-based or fixed currency amount	Percentage	—
Reference Point	Starting equity, running high water mark, or initial deposit	High Water Mark	—
Action on Breach	Halt new entries only, or close all positions and halt	Close All and Halt	—
Recovery Mode	Resume trading automatically when drawdown recovers, or require manual restart	Manual Restart	—

Typical Use Case

A 10% Max Drawdown Limit from the high water mark is a standard defensive configuration. When equity drops 10% from its peak, all positions are closed and the strategy is paused. This prevents a losing streak from spiralling into an account-threatening situation. During backtesting, this rule provides a realistic view of how drawdown protection would have affected your strategy's performance over time.

Equity Curve Trading

Overview

Equity Curve Trading is an advanced risk management technique that treats your strategy's equity curve as if it were a tradeable instrument. When the equity curve is above its moving average (indicating the strategy is performing well), trades are taken normally. When the equity curve drops below its moving average (indicating underperformance), new entries are suppressed or position sizes are reduced until the strategy returns to form.

This approach is based on the observation that strategy performance often exhibits serial correlation — periods of good performance tend to cluster, as do periods of poor performance. By scaling down during poor performance periods, you reduce exposure during the times when losses are most likely to continue.

Key Parameters

Parameter	Description	Default	Range
MA Period	Number of closed trades used to calculate the equity curve moving average	10	3 – 100
MA Type	Simple or Exponential moving average of the equity curve	SMA	—
Action Below MA	Skip entries entirely, reduce position size by a percentage, or trade with minimum size	Skip Entries	—
Size Reduction	Percentage to reduce position size when equity is below MA (if using size reduction)	50%	10% – 90%
Min Trades Before Active	Minimum number of completed trades before the equity curve filter activates	20	5 – 200

Typical Use Case

A 10-trade SMA on the equity curve with full entry suppression below the MA is a straightforward implementation. After the strategy completes its first 20 trades (the minimum threshold), it begins monitoring whether the current equity is above or below the 10-trade moving average. During backtesting, this rule often shows a modest reduction in total profit but a significant improvement in the Sharpe ratio and maximum drawdown.

Risk Rule: Equity Curve Trading
  MA Period: 10 trades
  MA Type: SMA
  Below MA: Skip Entries
  Min Trades: 20

  Behaviour:
  - Trades 1-20: Normal execution (building baseline)
  - Trade 21+: Check if equity > 10-trade SMA
    - Above: Normal execution
    - Below: No new entries until equity recovers

Recommended Risk Framework

A comprehensive risk management setup for a typical strategy includes all five risk rules working together:

1. Position Sizing (1% per trade) — Ensures each individual trade has a controlled, proportionate risk.
2. Max Open Trades (3–5) — Limits total simultaneous exposure across all instruments.
3. Max Daily Loss (2–3%) — Stops trading after a bad day to prevent emotional continuation.
4. Max Drawdown Limit (8–12%) — Acts as the ultimate safety net for your account.
5. Equity Curve Trading (10-trade SMA) — Adapts position sizing to the strategy's current performance state.

These rules form concentric layers of protection: the Position Sizing rule controls each trade, Max Open Trades controls the portfolio at any instant, Max Daily Loss controls each session, Max Drawdown controls the overall account, and Equity Curve Trading adapts to the strategy's ongoing effectiveness.