Building Automated Trading Strategies October 2018 | Page 24

CHAPTER-4: TRADING COST, RISK, AND MONEY
MANAGEMENT WHEN APPLYING AUTOMATED
STRATEGIES
Risk management refers to the process of protecting a trading account
against all systematic risks. Risk refers to the likeliness a partial or total loss
will occur. Risk management is certainly a very important issue towards the
long-term success of every automated strategy and must reflect your appetite
for risk.
These are the main categories of systematic risks that can be assessed and
managed:
(1) Market Risk (the general risk from unfavorable price movements)
➢ Management: Allocating no more than 1-2% of your available
capital on any individual market position
(2) Correlation Risks (price correlations between assets or asset classes)
➢ Management: Adding correlation parameters to the decision-making
process of your system (i.e. avoiding simultaneous positions on
EURUSD and GBPUSD which are 84% positively correlated pairs)
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