Dynamic Risk Management

Risk management is the most important aspect of any trading strategy. Arconomy provides a comprehensive set of built-in risk management rules that dynamically adapt to market conditions, account size, and position state. This page covers the core risk management tools, how to configure them, and best practices for protecting your capital.

Built-In Risk Management Rules

Arconomy includes several categories of risk rules that you can combine to build a robust risk framework. All risk rules are available in the rules library under the Risk category (orange-coloured nodes).

Available Risk Rules

• Percentage Risk Position Sizing -- Sizes each position so that the maximum loss (to your stop) equals a fixed percentage of your account equity
• Fixed Lot Position Sizing -- Uses a constant position size for every trade regardless of account size
• Kelly Criterion Position Sizing -- Dynamically sizes positions based on historical win rate and payoff ratio
• Fixed Stop Loss -- Places a stop loss at a fixed price distance or percentage from the entry price
• ATR Stop Loss -- Places a stop loss at a multiple of the Average True Range from the entry price
• Trailing Stop -- A stop that moves in the direction of the trade as price moves favourably, locking in profits
• Fixed Take Profit -- Closes the position at a predetermined profit target
• Risk-Reward Take Profit -- Sets the take profit based on a multiple of the stop distance
• Maximum Drawdown Guard -- Halts all trading if the account drawdown exceeds a specified threshold
• Maximum Concurrent Positions -- Limits the total number of open positions at any time
• Maximum Daily Loss -- Stops opening new trades if the day's losses exceed a threshold
• Maximum Exposure Per Symbol -- Caps the total exposure to any single instrument

Position Sizing

Position sizing determines how many units or lots to trade on each entry. Proper position sizing ensures that no single trade can cause disproportionate damage to your account.

Percentage Risk Method

The most widely recommended approach is the percentage risk method. You define a maximum percentage of your account equity that you are willing to lose on any single trade. The position size is then calculated based on the distance between the entry price and the stop loss.

Position Size = (Account Equity * Risk Percentage) / Stop Distance

Example:
  Account Equity:   $50,000
  Risk per Trade:   1% = $500
  Entry Price:      $100.00
  Stop Loss:        $97.00
  Stop Distance:    $3.00

  Position Size = $500 / $3.00 = 166 shares

This method automatically adjusts position size to account volatility -- wider stops result in smaller positions, and tighter stops allow larger positions, keeping your dollar risk constant.

Fixed Lot Method

The fixed lot method uses the same position size for every trade. While simple, it does not account for varying stop distances or changing account equity. It is suitable for strategies where you want consistent lot sizes, such as when trading futures contracts.

Kelly Criterion Method

The Kelly Criterion uses your strategy's historical win rate and average win/loss ratio to calculate the mathematically optimal position size. Arconomy calculates the Kelly fraction from your backtest results and applies a configurable safety factor (typically 0.25x to 0.5x of the full Kelly) to reduce volatility.

Stop Losses

Stop losses are non-negotiable for any live trading strategy. They define the maximum amount you are willing to lose on a single trade and automatically close the position if price moves against you beyond the stop level.

Fixed Stop Loss

A fixed stop loss is placed at a set distance from the entry price. You can specify the distance as:

• Points/Pips -- A fixed number of price points (e.g., 50 pips below entry for forex)
• Percentage -- A percentage of the entry price (e.g., 3% below entry)
• Dollar amount -- A fixed dollar distance (e.g., $2.00 below entry)

Fixed stops are simple and predictable but do not adapt to market volatility. In volatile markets, they may trigger prematurely; in quiet markets, they may be unnecessarily wide.

ATR-Based Stop Loss

An ATR-based stop uses the Average True Range indicator to set a volatility-adjusted stop distance. You specify a multiplier (e.g., 2x ATR) and the ATR period (e.g., 14 bars). The stop is placed at:

Long position:  Stop = Entry Price - (ATR(period) * multiplier)
Short position: Stop = Entry Price + (ATR(period) * multiplier)

Example (Long):
  Entry Price:    $100.00
  ATR(14):        $1.50
  Multiplier:     2.0
  Stop Loss:      $100.00 - ($1.50 * 2.0) = $97.00

ATR-based stops are the recommended approach for most strategies because they automatically adapt to current market conditions. When volatility is high, the stop is wider (preventing premature exits); when volatility is low, the stop is tighter (protecting against small adverse moves that are significant in context).

Trailing Stops

A trailing stop follows the price as it moves in your favour, locking in profits while still giving the trade room to breathe. Unlike a fixed stop that stays at a constant level, a trailing stop ratchets upward (for longs) or downward (for shorts) as the trade progresses.

Trailing Stop Types

Arconomy supports several trailing stop variants:

• Fixed-distance trailing -- The stop trails at a constant distance (e.g., always 2% below the highest price since entry). Simple and effective for trending markets.
• ATR-based trailing -- The stop trails at an ATR multiple. This adapts the trail distance to current volatility, widening in volatile periods and tightening in quiet ones.
• Chandelier trailing -- The stop is set below the highest high (for longs) by an ATR multiple, recalculated on each bar. This is a classic trend-following exit.
• Step trailing -- The stop only moves when price reaches a new threshold (e.g., moves up by 1% for every 2% gain). This creates a staircase pattern that reduces whipsaws.

Configuring a Trailing Stop

When adding a Trailing Stop rule from the library, you will configure:

• Trail type -- Fixed distance, ATR-based, Chandelier, or Step
• Trail distance -- The distance parameter (percentage, points, or ATR multiplier depending on type)
• Activation threshold -- Optionally, the trailing stop can remain inactive until the trade reaches a minimum profit level. For example, "start trailing only after 1% profit" prevents the stop from interfering with the initial trade development.
• ATR period -- For ATR-based types, the lookback period for the ATR calculation

Example: ATR Trailing Stop with Activation

  Entry Price:         $100.00
  ATR(14):             $1.50
  Trail Multiplier:    2.0x ATR = $3.00
  Activation:          After 1% gain ($101.00)

  Bar 1: Price $100.50  -> Trail inactive (below $101.00)
  Bar 2: Price $101.20  -> Trail activates. Stop = $101.20 - $3.00 = $98.20
  Bar 3: Price $103.00  -> Stop moves up: $103.00 - $3.00 = $100.00
  Bar 4: Price $102.50  -> Stop stays at $100.00 (price fell but stop doesn't move down)
  Bar 5: Price $105.00  -> Stop moves up: $105.00 - $3.00 = $102.00
  Bar 6: Price $101.80  -> Stop triggered at $102.00. Position closed.

Take Profit Targets

Take profit rules automatically close a position when it reaches a predetermined profit level. While trailing stops let profits run, take profit rules provide certainty about the exit level. You can use both simultaneously -- the position closes at whichever level is reached first.

Fixed Take Profit

Set a fixed profit target as a percentage, point distance, or dollar amount from the entry price. For example, close the position at 5% profit above entry.

Risk-Reward Take Profit

Set the take profit as a multiple of your stop distance. This ensures a consistent risk-reward ratio on every trade. Common setups include:

• 2:1 risk-reward -- Take profit at 2x the stop distance. If your stop is $3 below entry, your take profit is $6 above entry.
• 3:1 risk-reward -- Take profit at 3x the stop distance. Requires a lower win rate to be profitable.
• 1.5:1 risk-reward -- A more conservative ratio that allows a higher win rate.

Managing Multiple Positions

When your strategy trades multiple symbols or allows re-entries on the same symbol, you need rules to control overall portfolio exposure.

Maximum Concurrent Positions

This rule limits the total number of open positions at any time. When the limit is reached, new entry signals are ignored until an existing position is closed. Configure the maximum count in the rule's configuration panel.

Maximum Exposure Per Symbol

This rule caps the total position size for any single symbol. It prevents over-concentration in one instrument, which is especially important in multi-symbol strategies. You can specify the limit as:

• A percentage of account equity (e.g., no more than 10% of equity in any one symbol)
• A fixed dollar amount (e.g., no more than $5,000 in any one symbol)
• A fixed number of units or lots

Maximum Daily Loss

This rule tracks the cumulative losses incurred during a single trading day. If losses exceed the configured threshold, all new entries are blocked for the remainder of the day. This prevents revenge trading and protects against cascading losses during adverse market conditions.

Example Risk Configuration:

  Position Sizing:         1% risk per trade
  Stop Loss:               2x ATR(14)
  Trailing Stop:           ATR-based, 2.5x, activates at 1% profit
  Take Profit:             3:1 risk-reward ratio
  Max Concurrent Positions: 5
  Max Exposure Per Symbol:  10% of equity
  Max Daily Loss:           3% of equity
  Max Drawdown Guard:       15% of peak equity

Maximum Drawdown Guard

The drawdown guard monitors the account's peak-to-trough drawdown. If the drawdown exceeds a specified percentage (e.g., 15%), all trading is halted -- both new entries and existing positions can be closed automatically. This is a circuit breaker for extreme adverse conditions.

You can configure the drawdown guard to:

• Block new entries only -- Existing positions remain open but no new trades are taken
• Close all positions -- Every open position is immediately closed and trading is suspended
• Auto-resume -- Trading resumes automatically after the drawdown recovers to a specified level, or stays suspended until you manually re-enable it

Combining Risk Rules

Risk rules are designed to work together. A well-configured strategy typically uses multiple risk rules in combination. Here is a recommended setup for most strategies:

1. Position sizing rule -- Always include one. The percentage risk method is recommended.
2. Stop loss -- Always include one. ATR-based stops are the most versatile.
3. Trailing stop or take profit -- Include at least one profit-taking mechanism. Using both a trailing stop and a partial take profit provides a good balance.
4. Portfolio-level limits -- Include maximum concurrent positions and/or maximum exposure rules if trading multiple symbols.
5. Circuit breakers -- Include a maximum drawdown guard and/or maximum daily loss as a safety net.

Best Practices

• Always use a stop loss -- No matter how confident you are in your entry logic, every trade should have a defined maximum loss.
• Keep risk per trade low -- Risk 0.5% to 2% of your account per trade. This ensures you can survive a string of losses without significant drawdown.
• Backtest with realistic risk settings -- Do not backtest without risk rules and then add them later. Risk rules significantly affect performance metrics and should be part of every backtest.
• Use ATR-based stops for adaptability -- Fixed stops do not account for changing volatility. ATR-based stops adjust automatically.
• Set portfolio-level limits -- Even if you trade a single symbol, set a maximum drawdown guard as a safety net.
• Test on demo first -- Before deploying any strategy to a live account, run it on a demo account for a sufficient period to verify that risk rules behave as expected in real-time conditions.