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Risk Management

Risk management is the foundation upon which all successful trading is built. This document covers comprehensive risk management principles and techniques essential for preserving capital and achieving sustainable performance.

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Risk Dimensions

Risk is multi-dimensional. Focusing on one dimension while ignoring others leads to false confidence.
DimensionDescriptionMetric
Per-trade riskMaximum loss on a single trade% of capital
Daily riskMaximum loss in a single dayDaily VaR
Portfolio riskAggregate exposure across all positionsPortfolio volatility
Drawdown riskPeak-to-trough capital declineMax drawdown
Correlation riskRisk from correlated positions moving togetherCorrelation matrix

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Position Sizing

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Fixed Fractional Method

Risk a fixed percentage of capital per trade (typically 1-2%). 
Position Size = (Account * Risk%) / (Entry - StopLoss)

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ATR-Based Sizing (MangroveAI Default)

Uses Average True Range to dynamically adjust position sizes based on volatility. MangroveAI strategies use execution_config.max_risk_per_trade (default: 0.01 = 1%) with ATR-based stop-loss calculation.

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Stop-Loss Management

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Dynamic ATR Stop-Loss

MangroveAI’s default method:
  • Stop distance = ATR * volatility factor
  • Default: 14-period ATR * 2.0 multiplier
  • Configured via atr_period and atr_volatility_factor in execution_config

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Time-Based Exits

  • max_hold_bars — Exit after N bars regardless of P/L
  • exit_on_loss_after_bars — Exit losing positions after N bars
  • exit_on_profit_after_bars — Exit winning positions after N bars

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Key Principles

  1. Never risk more than you can afford to lose on a single trade
  2. Diversify across uncorrelated strategies and assets
  3. Set maximum drawdown limits and stop trading if breached
  4. Size positions based on volatility, not conviction
  5. Use stop-losses on every trade — no exceptions
For the complete Risk Management reference, see knowledge-base/05-risk-management.md in the repository.