A proper risk management is essential in algorithmic trading. Knowing the stop-loss level before opening a position allows establishing, in a consistent manner, the position size in relation to the percentage of the balance that is willing to be risked.
Relationship between Stop-Loss, Risk, and Volume
The premise is simple: every trade must risk a fixed fraction of the balance. For this, the EA needs to know the stop-loss in advance, as it determines the magnitude of the adverse move that will be tolerated. This way, it is possible to calculate the necessary volume so that, in case the stop-loss is triggered, the loss remains within the predefined percentage.
Configuration Scenarios in EAs
- Exclusive use of a fixed volume parameter:
Some EAs operate with a constant size. In this case, the variability of the stop-loss causes the risk in each trade to fluctuate. If the stop-loss is set tighter, a greater proportion of the balance is risked; if it is set further away, the risk decreases. This results in an inconsistency in capital exposure. - Defining risk as a percentage of the balance:
This strategy allows the same fraction of the balance to be risked in each trade, but it generates sizes that vary significantly depending on the closeness or distance of the stop-loss. A very tight stop-loss may result in an excessively high volume value, while a wider one will significantly reduce the position size.
The expert advisor Scout The Smart Hunter integrates both key parameters:
- Risk Limit: Defines the percentage of the balance to risk in each trade.
- Maximum Volume: Sets a cap for the size, so that even if the calculation based on the stop-loss suggests a high volume, it is limited to the maximum allowed value.
This combination ensures that, regardless of the variation in the distance of the stop-loss, the risk remains constant and the position size stays within reasonable parameters. For example, if the ideal calculation based on risk exceeds the maximum allowed, the EA will adjust the size to that threshold.
Benefits of the System
- Constant risk: Every trade risks the same percentage of the balance, regardless of the stop-loss conditions.
- Exposure control: The integration of a volume cap prevents the EA from assigning disproportionate position sizes in situations with tight stop-loss settings.
- Operational adaptability: The system adjusts dynamically to different strategies and market conditions, offering a consistent and disciplined risk management approach.
Conclusions
Integrating the calculation of position size with a control based on the percentage of the balance and a size limit allows for consistent and safe trading. Scout The Smart Hunter exemplifies how this methodology solves the inherent problems of using isolated parameters, providing efficient risk management adaptable to various market scenarios.
The results obtained from the use of the software mentioned in this article are not guaranteed. Trading in the financial markets carries significant risk and may not be suitable for all investors. The developer is not responsible for any loss or damage resulting from its use. Nor does it guarantee ongoing support or updates. Use the software at your own risk.