Version: Next 🚧

How to Configure Risk Parameters

Problem

You need to define risk limits to protect your capital and ensure you trade within your risk tolerance. Proper risk parameters prevent catastrophic losses and help maintain long-term profitability.

Prerequisites

Basic algorithm configuration completed (Step 1)
Position sizing configured (Step 2)
Entry and exit conditions configured (Steps 3-4)
Understanding of your risk tolerance

Risk Parameters Overview

{
  "riskParameters": {
    "maxPositionSize": 10.0,
    "stopLoss": 2.0,
    "takeProfit": 4.0,
    "maxDailyLoss": 50000,
    "maxOpenPositions": 5,
    "riskRewardRatio": 2.0
  }
}

Maximum Position Size

Limits the percentage of capital allocated to a single position.

Configuration

{
  "riskParameters": {
    "maxPositionSize": 10.0  // 10% of account
  }
}

How It Works

Prevents over-concentration in a single position, regardless of position sizing method.

Example:

Account: ₹10,00,000 Max Position Size: 10% Maximum Allowed: ₹1,00,000

Scenario 1: Within Limit

Position sizing calculates: ₹80,000
Max position size: ₹1,00,000
✅ Trade executes with ₹80,000

Scenario 2: Exceeds Limit

Position sizing calculates: ₹1,50,000
Max position size: ₹1,00,000
⚠️ Trade executes with ₹1,00,000 (capped)

Recommended Values

Risk Profile	Max Position Size	Use Case
Conservative	2-5%	Capital preservation
Moderate	5-10%	Balanced approach
Aggressive	10-20%	Growth-focused
Very Aggressive	20-30%	High risk tolerance

Professional Recommendation: 5-10% for most traders

Account Size Considerations

Small Account (< ₹5,00,000):

{
  "maxPositionSize": 15.0  // Can be higher due to limited diversification
}

Medium Account (₹5,00,000 - ₹50,00,000):

{
  "maxPositionSize": 10.0  // Standard recommendation
}

Large Account (> ₹50,00,000):

{
  "maxPositionSize": 5.0  // More conservative, better diversification
}

Interaction with Position Sizing

Max position size acts as a cap on all position sizing methods:

Percentage-Based:

{
  "positionSizing": {
    "method": "percentage",
    "percentage": 15.0  // Wants 15%
  },
  "riskParameters": {
    "maxPositionSize": 10.0  // Caps at 10%
  }
}

Result: Position will be 10% (capped)

Risk-Based:

{
  "positionSizing": {
    "method": "risk_based",
    "riskPercentage": 2.0
  },
  "riskParameters": {
    "maxPositionSize": 10.0,
    "stopLoss": 1.0  // Tight stop = large position
  }
}

If calculated position exceeds 10%, it will be capped.

Stop Loss Percentage

Required stop loss for all trades (used in risk-based position sizing).

Configuration

{
  "riskParameters": {
    "stopLoss": 2.0  // 2% stop loss
  }
}

How It Works

For Risk-Based Position Sizing: Used to calculate position size based on risk amount.

Position Size = (Account × Risk%) / Stop Loss%

Example:

Account: ₹10,00,000
Risk: 1%
Stop Loss: 2%
Position Size: (₹10,00,000 × 1%) / 2% = ₹50,000

For Other Position Sizing Methods: Acts as a guideline and validation check.

Recommended Values

Volatility	Stop Loss %	Use Case
Low	1-2%	Large caps, stable stocks
Medium	2-3%	Mid caps, normal volatility
High	3-5%	Small caps, volatile stocks
Very High	5-10%	Penny stocks, crypto

Strategy-Specific Recommendations

Scalping:

{
  "stopLoss": 0.5  // 0.5% - tight stops
}

Day Trading:

{
  "stopLoss": 1.5  // 1.5% - moderate stops
}

Swing Trading:

{
  "stopLoss": 3.0  // 3% - wider stops
}

Position Trading:

{
  "stopLoss": 5.0  // 5% - very wide stops
}

Validation

System validates that stop loss is reasonable:

{
  "stopLoss": 0.1  // ⚠️ Too tight (< 0.5%)
}

{
  "stopLoss": 50.0  // ⚠️ Too wide (> 50%)
}

Valid Range: 0.1% - 50%

Take Profit Percentage

Optional take profit target (used with risk-reward ratio).

Configuration

{
  "riskParameters": {
    "takeProfit": 4.0  // 4% take profit
  }
}

How It Works

With Risk-Reward Ratio:

{
  "riskParameters": {
    "stopLoss": 2.0,
    "riskRewardRatio": 2.0
  }
}

Take Profit = 2% × 2.0 = 4%

Explicit Take Profit:

{
  "riskParameters": {
    "stopLoss": 2.0,
    "takeProfit": 6.0  // Explicit 6% target
  }
}

Recommended Values

Strategy	Take Profit %	Holding Period
Scalping	0.5-1%	Minutes
Day Trading	2-4%	Hours
Swing Trading	5-10%	Days
Position Trading	15-30%	Weeks/Months

Relationship with Stop Loss

Conservative (1:1):

{
  "stopLoss": 2.0,
  "takeProfit": 2.0  // Equal risk-reward
}

Moderate (1:2):

{
  "stopLoss": 2.0,
  "takeProfit": 4.0  // Double reward
}

Aggressive (1:3):

{
  "stopLoss": 2.0,
  "takeProfit": 6.0  // Triple reward
}

Maximum Daily Loss

Circuit breaker that pauses algorithm after reaching daily loss limit.

Configuration

{
  "riskParameters": {
    "maxDailyLoss": 50000  // ₹50,000 daily loss limit
  }
}

How It Works

Tracking: System tracks P&L from midnight (00:00 IST)
Calculation: Includes realized + unrealized losses
Trigger: When daily loss reaches limit
Action: Algorithm automatically pauses
Reset: Resets at midnight for next trading day

Example:

Account: ₹10,00,000 Max Daily Loss: ₹50,000 (5% of account)

Time	Trade	P&L	Cumulative	Status
09:30	Trade 1	-₹15,000	-₹15,000	✅ Active
11:00	Trade 2	-₹20,000	-₹35,000	✅ Active
13:00	Trade 3	-₹18,000	-₹53,000	⛔ Paused!

Algorithm pauses and won't take new trades until next day.

Recommended Values

Risk Profile	Daily Loss %	Daily Loss Amount
Conservative	1-2%	₹10,000 - ₹20,000 (₹10L account)
Moderate	2-5%	₹20,000 - ₹50,000 (₹10L account)
Aggressive	5-10%	₹50,000 - ₹1,00,000 (₹10L account)

Professional Recommendation: 2-3% of account

Account Size Examples

Small Account (₹5,00,000):

{
  "maxDailyLoss": 10000  // 2% of account
}

Medium Account (₹10,00,000):

{
  "maxDailyLoss": 30000  // 3% of account
}

Large Account (₹50,00,000):

{
  "maxDailyLoss": 100000  // 2% of account
}

Circuit Breaker System

Automatic Actions:

Pause algorithm
Close all open positions (optional)
Send notification
Log event
Prevent new entries

Configuration:

{
  "riskParameters": {
    "maxDailyLoss": 50000,
    "circuitBreaker": {
      "closePositions": false,  // Keep positions open
      "notifyUser": true,
      "preventNewEntries": true
    }
  }
}

Multiple Algorithms

Daily loss is tracked per algorithm, not portfolio-wide.

Algorithm 1:

{
  "maxDailyLoss": 30000
}

Algorithm 2:

{
  "maxDailyLoss": 20000
}

Total Portfolio Risk: ₹50,000

For portfolio-wide limits, see Portfolio Risk Management.

Maximum Open Positions

Limits the number of simultaneous open positions.

Configuration

{
  "riskParameters": {
    "maxOpenPositions": 5  // Maximum 5 positions at once
  }
}

How It Works

Example:

Max Open Positions: 3

Time	Action	Open Positions	Status
09:30	Buy RELIANCE	1	✅ Executed
10:00	Buy TCS	2	✅ Executed
11:00	Buy INFY	3	✅ Executed
12:00	Buy HDFC	3	⛔ Blocked (limit reached)
13:00	Sell RELIANCE	2	Position closed
14:00	Buy HDFC	3	✅ Executed (slot available)

Recommended Values

Strategy	Max Positions	Reason
Focused	1-3	Deep analysis, high conviction
Balanced	3-5	Diversification, manageable
Diversified	5-10	Spread risk, more opportunities
Portfolio	10-20	Full diversification

Professional Recommendation: 3-5 positions for most traders

Account Size Considerations

Small Account (< ₹5,00,000):

{
  "maxOpenPositions": 2  // Limited capital
}

Medium Account (₹5,00,000 - ₹50,00,000):

{
  "maxOpenPositions": 5  // Good diversification
}

Large Account (> ₹50,00,000):

{
  "maxOpenPositions": 10  // Full diversification
}

Interaction with Position Sizing

Example:

Account: ₹10,00,000 Max Position Size: 10% Max Open Positions: 5

Maximum Total Exposure: 5 × 10% = 50% of account

This prevents over-leveraging while allowing diversification.

Strategy-Specific Settings

Scalping (High Frequency):

{
  "maxOpenPositions": 1  // One at a time, quick in/out
}

Day Trading:

{
  "maxOpenPositions": 3  // Few positions, active management
}

Swing Trading:

{
  "maxOpenPositions": 5  // Multiple positions, less active
}

Position Trading:

{
  "maxOpenPositions": 10  // Long-term holds, diversified
}

Risk-Reward Ratio

Minimum ratio of potential profit to potential loss.

Configuration

{
  "riskParameters": {
    "riskRewardRatio": 2.0  // Minimum 1:2 risk-reward
  }
}

How It Works

Calculation:

Risk-Reward Ratio = Potential Profit / Potential Loss

Example:

Entry: ₹500 Stop Loss: ₹490 (2% loss = ₹10 risk) Take Profit: ₹520 (4% profit = ₹20 reward) Risk-Reward: ₹20 / ₹10 = 2.0 (1:2 ratio)

Minimum Ratio Enforcement

{
  "riskRewardRatio": 2.0  // Minimum 1:2
}

Trade Validation:

Scenario 1: Meets Requirement

Risk: ₹10
Reward: ₹25
Ratio: 2.5
✅ Trade allowed

Scenario 2: Doesn't Meet Requirement

Risk: ₹10
Reward: ₹15
Ratio: 1.5
⛔ Trade blocked

Recommended Ratios

Win Rate	Min Ratio	Breakeven	Use Case
60%+	1:1	40% win rate	High probability
50%	1:1.5	40% win rate	Balanced
40%	1:2	33% win rate	Standard
30%	1:3	25% win rate	Trend-following
20%	1:4	20% win rate	Home runs

Breakeven Win Rate Calculation

Breakeven Win Rate = 1 / (1 + Risk-Reward Ratio)

Examples:

1:1 Ratio:

Breakeven: 1 / (1 + 1) = 50%
Need 50% win rate to break even

1:2 Ratio:

Breakeven: 1 / (1 + 2) = 33.3%
Need 33.3% win rate to break even

1:3 Ratio:

Breakeven: 1 / (1 + 3) = 25%
Need 25% win rate to break even

Strategy Profitability

Example 1: High Win Rate, Low Ratio

Win Rate: 60%
Risk-Reward: 1:1
Avg Win: ₹10,000
Avg Loss: ₹10,000
Expected Value: (0.6 × ₹10,000) - (0.4 × ₹10,000) = ₹2,000 per trade

Example 2: Low Win Rate, High Ratio

Win Rate: 30%
Risk-Reward: 1:3
Avg Win: ₹30,000
Avg Loss: ₹10,000
Expected Value: (0.3 × ₹30,000) - (0.7 × ₹10,000) = ₹2,000 per trade

Both are equally profitable!

Automatic Take Profit Calculation

{
  "riskParameters": {
    "stopLoss": 2.0,
    "riskRewardRatio": 2.0
  }
}

System automatically calculates:

Take Profit = 2% × 2.0 = 4%

Complete Risk Parameter Examples

Example 1: Conservative Profile

{
  "riskParameters": {
    "maxPositionSize": 5.0,
    "stopLoss": 1.5,
    "takeProfit": 4.5,
    "maxDailyLoss": 20000,
    "maxOpenPositions": 3,
    "riskRewardRatio": 3.0
  }
}

Profile:

Small positions (5%)
Tight stops (1.5%)
High risk-reward (1:3)
Low daily loss limit (2% of ₹10L account)
Few positions (3)

Expected Drawdown: 5-10% Suitable For: Risk-averse traders, beginners

Example 2: Moderate Profile

{
  "riskParameters": {
    "maxPositionSize": 10.0,
    "stopLoss": 2.0,
    "takeProfit": 4.0,
    "maxDailyLoss": 50000,
    "maxOpenPositions": 5,
    "riskRewardRatio": 2.0
  }
}

Profile:

Standard positions (10%)
Moderate stops (2%)
Balanced risk-reward (1:2)
Moderate daily loss limit (5% of ₹10L account)
Balanced positions (5)

Expected Drawdown: 10-20% Suitable For: Most traders, balanced approach

Example 3: Aggressive Profile

{
  "riskParameters": {
    "maxPositionSize": 20.0,
    "stopLoss": 3.0,
    "takeProfit": 6.0,
    "maxDailyLoss": 100000,
    "maxOpenPositions": 10,
    "riskRewardRatio": 2.0
  }
}

Profile:

Large positions (20%)
Wide stops (3%)
Standard risk-reward (1:2)
High daily loss limit (10% of ₹10L account)
Many positions (10)

Expected Drawdown: 20-30% Suitable For: Experienced traders, high risk tolerance

Portfolio Risk Management

Multiple Algorithms

When running multiple algorithms, consider total portfolio risk:

Algorithm 1 (Scalping):

{
  "maxPositionSize": 5.0,
  "maxDailyLoss": 20000,
  "maxOpenPositions": 2
}

Algorithm 2 (Swing Trading):

{
  "maxPositionSize": 10.0,
  "maxDailyLoss": 30000,
  "maxOpenPositions": 5
}

Total Portfolio Risk:

Max Daily Loss: ₹50,000
Max Open Positions: 7
Max Exposure: (2 × 5%) + (5 × 10%) = 60%

Correlation Considerations

Avoid Over-Concentration:

Bad Example:

Algorithm 1: Trading NIFTY stocks
Algorithm 2: Trading BANKNIFTY stocks
Algorithm 3: Trading NIFTY futures
Problem: All correlated, no diversification

Good Example:

Algorithm 1: Trading equities
Algorithm 2: Trading commodities
Algorithm 3: Trading currencies
Benefit: Diversified, uncorrelated

Portfolio-Wide Limits

Set limits across all algorithms:

{
  "portfolioRiskParameters": {
    "maxTotalDailyLoss": 100000,
    "maxTotalOpenPositions": 15,
    "maxTotalExposure": 70.0
  }
}

Verification

After configuring risk parameters, verify:

Position size is appropriate
- Not too large (over-concentration)
- Not too small (transaction costs)
- Matches risk tolerance
Stop loss is reasonable
- Matches volatility
- Not too tight (false stops)
- Not too wide (excessive risk)
Daily loss limit protects capital
- 1-5% of account
- Prevents catastrophic losses
- Allows recovery
Max positions allows diversification
- Not too few (concentration risk)
- Not too many (management difficulty)
- Matches account size
Risk-reward ratio is favorable
- Minimum 1:1.5
- Matches win rate
- Ensures profitability

Troubleshooting

Positions Too Small

Problem: Calculated positions are tiny.

Solutions:

Increase maxPositionSize
Reduce stopLoss percentage
Increase risk percentage (position sizing)
Check if account size is sufficient

Daily Loss Limit Hit Frequently

Problem: Algorithm pauses every day.

Solutions:

Increase maxDailyLoss
Reduce position sizes
Tighten stop losses
Improve strategy (reduce losses)
Review entry conditions

Too Many Blocked Trades

Problem: Trades blocked due to max positions.

Solutions:

Increase maxOpenPositions
Close losing positions faster
Use tighter stops
Reduce entry frequency
Implement position priority

Risk-Reward Blocking Trades

Problem: Trades blocked due to risk-reward ratio.

Solutions:

Reduce minimum ratio
Widen take profit targets
Tighten stop losses
Review if ratio is realistic
Check historical price moves

Over-Leveraged Portfolio

Problem: Total exposure across algorithms is too high.

Solutions:

Reduce maxPositionSize per algorithm
Reduce maxOpenPositions per algorithm
Implement portfolio-wide limits
Close some algorithms
Reduce number of active algorithms

Problem​

Prerequisites​

Risk Parameters Overview​

Maximum Position Size​

Configuration​

How It Works​

Recommended Values​

Account Size Considerations​

Interaction with Position Sizing​

Stop Loss Percentage​

Configuration​

How It Works​

Recommended Values​

Strategy-Specific Recommendations​

Validation​

Take Profit Percentage​

Configuration​

How It Works​

Recommended Values​

Relationship with Stop Loss​

Maximum Daily Loss​

Configuration​

How It Works​

Recommended Values​

Account Size Examples​

Circuit Breaker System​

Multiple Algorithms​

Maximum Open Positions​

Configuration​

How It Works​

Recommended Values​

Account Size Considerations​

Interaction with Position Sizing​

Strategy-Specific Settings​

Risk-Reward Ratio​

Configuration​

How It Works​

Minimum Ratio Enforcement​

Recommended Ratios​

Breakeven Win Rate Calculation​

Strategy Profitability​

Automatic Take Profit Calculation​

Complete Risk Parameter Examples​

Example 1: Conservative Profile​

Example 2: Moderate Profile​

Example 3: Aggressive Profile​

Portfolio Risk Management​

Multiple Algorithms​

Correlation Considerations​

Portfolio-Wide Limits​

Verification​

Troubleshooting​

Positions Too Small​

Daily Loss Limit Hit Frequently​

Too Many Blocked Trades​

Risk-Reward Blocking Trades​

Over-Leveraged Portfolio​

Related​

Problem

Prerequisites

Risk Parameters Overview

Maximum Position Size

Configuration

How It Works

Recommended Values

Account Size Considerations

Interaction with Position Sizing

Stop Loss Percentage

Configuration

How It Works

Recommended Values

Strategy-Specific Recommendations

Validation

Take Profit Percentage

Configuration

How It Works

Recommended Values

Relationship with Stop Loss

Maximum Daily Loss

Configuration

How It Works

Recommended Values

Account Size Examples

Circuit Breaker System

Multiple Algorithms

Maximum Open Positions

Configuration

How It Works

Recommended Values

Account Size Considerations

Interaction with Position Sizing

Strategy-Specific Settings

Risk-Reward Ratio

Configuration

How It Works

Minimum Ratio Enforcement

Recommended Ratios

Breakeven Win Rate Calculation

Strategy Profitability

Automatic Take Profit Calculation

Complete Risk Parameter Examples

Example 1: Conservative Profile

Example 2: Moderate Profile

Example 3: Aggressive Profile

Portfolio Risk Management

Multiple Algorithms

Correlation Considerations

Portfolio-Wide Limits

Verification

Troubleshooting

Positions Too Small

Daily Loss Limit Hit Frequently

Too Many Blocked Trades

Risk-Reward Blocking Trades

Over-Leveraged Portfolio

Related