Risk Management Basics
Risk management is how you stay in the game long enough for an edge to work. It’s not about avoiding losses completely — it’s about keeping losses within a range you can survive.
What is drawdown?
Drawdown is the drop from your account’s peak balance/equity to a lower point.
Example: If your account grows to $1,200 and later dips to $1,050, the drawdown is $150 (and about 12.5% from the peak).
Why buffers matter
- A buffer helps you avoid being forced to close positions during temporary market stress.
- It reduces the chance of margin pressure when baskets are deeper than normal.
- It gives the strategy time to work through volatility instead of “panicking” out.
Practical rules we use (simple version)
- Use a sensible starting balance and avoid over-sizing.
- Keep extra buffer funds available (so the system isn’t operating on the edge).
- Accept that drawdown is normal — the goal is to keep it controlled.
- Don’t trade money you can’t afford to risk.
Automated trading can reduce emotion, but it doesn’t remove risk. Risk is managed with sizing, buffers, and discipline — not hope.