Risk Parameters Schema

This document provides the complete schema reference for the riskParameters configuration object. Risk parameters define position limits, loss limits, and risk-reward requirements to protect capital.

Overview

Risk parameters are part of Step 5 of algorithm configuration. They control:

• Maximum position size per trade
• Stop loss and take profit percentages
• Maximum daily loss limits
• Maximum number of open positions
• Minimum risk-reward ratio

Schema Structure

interface RiskParameters {
  maxPositionSize: number
  stopLoss: number
  takeProfit?: number
  maxDailyLoss: number
  maxOpenPositions: number
  riskRewardRatio: number
}

Field Descriptions

maxPositionSize

• Type: number
• Required: Yes
• Range: 0.01 to 100
• Unit: Percentage of account balance
• Description: Maximum percentage of account that can be allocated to a single position
• Recommended: 2 to 10
• Example: 5.0

Purpose: Prevents over-concentration in a single position.

Calculation:

Max Position Value = Account Balance × (maxPositionSize / 100)

Examples:

With ₹100,000 account:

• maxPositionSize: 5.0 → Maximum ₹5,000 per position
• maxPositionSize: 10.0 → Maximum ₹10,000 per position

Interaction with Position Sizing:

• If position sizing method calculates larger size, it's capped at maxPositionSize
• Acts as a safety limit regardless of sizing method

Risk Profiles:

// Conservative
{
  "maxPositionSize": 2.0
}

// Moderate
{
  "maxPositionSize": 5.0
}

// Aggressive
{
  "maxPositionSize": 10.0
}

---

stopLoss

• Type: number
• Required: Yes
• Range: 0.1 to 50
• Unit: Percentage
• Description: Required stop loss percentage for risk-based position sizing
• Recommended: 1 to 5
• Example: 2.0

Purpose:

• Used in risk-based position sizing calculations
• Ensures minimum stop loss is set
• Validates exit conditions

Usage in Risk-Based Sizing:

Risk Amount = Account Balance × Risk Percentage
Stop Distance = Entry Price × (stopLoss / 100)
Position Size = Risk Amount / Stop Distance

Example:

{
  "stopLoss": 2.0
}

With ₹100,000 account, 1.5% risk, ₹500 entry:

• Risk Amount = ₹100,000 × 1.5% = ₹1,500
• Stop Distance = ₹500 × 2% = ₹10
• Position Size = ₹1,500 / ₹10 = 150 shares

Strategy-Specific Recommendations:

• Scalping: 0.5-1%
• Day Trading: 1-2%
• Swing Trading: 2-5%
• Position Trading: 5-10%

---

takeProfit

• Type: number
• Required: No
• Range: 0.1 to 100
• Unit: Percentage
• Description: Optional take profit percentage for validation
• Recommended: 2 to 10
• Example: 4.0

Purpose:

• Validates exit conditions have reasonable profit targets
• Used in risk-reward ratio calculations
• Ensures profitable strategy design

Example:

{
  "takeProfit": 4.0
}

With 2% stop loss and 4% take profit:

• Risk-Reward Ratio = 4% / 2% = 2:1

Recommended Values:

• Should be at least equal to stopLoss (1:1 ratio)
• Typically 2-3x stopLoss for good risk-reward
• Higher for swing/position trading (5-20%)

---

maxDailyLoss

• Type: number
• Required: Yes
• Range: 100 to 10000000
• Unit: Currency (₹)
• Description: Maximum loss allowed per day before circuit breaker activates
• Recommended: 1-5% of account balance
• Example: 5000

Purpose:

• Protects against catastrophic losses
• Prevents emotional trading after losses
• Implements circuit breaker system

Circuit Breaker Behavior: When daily loss reaches maxDailyLoss:

1. All active algorithms are paused
2. No new positions can be opened
3. Existing positions remain open
4. Resets at start of next trading day

Calculation:

Daily Loss = Sum of all closed position P&L for the day
If Daily Loss >= maxDailyLoss:
  Trigger Circuit Breaker

Example:

{
  "maxDailyLoss": 5000
}

With ₹100,000 account:

• maxDailyLoss: ₹5,000 (5% of account)
• After losing ₹5,000 in a day, all algorithms pause
• Can resume trading next day

Risk Profiles:

// Conservative (1-2% of account)
{
  "maxDailyLoss": 2000  // ₹100k account
}

// Moderate (3-5% of account)
{
  "maxDailyLoss": 5000  // ₹100k account
}

// Aggressive (5-10% of account)
{
  "maxDailyLoss": 10000  // ₹100k account
}

Best Practices:

• Set based on account size (1-5%)
• Consider trading style (scalpers need lower limits)
• Account for multiple algorithms running simultaneously
• Review and adjust based on performance

---

maxOpenPositions

• Type: number
• Required: Yes
• Range: 1 to 50
• Description: Maximum number of positions that can be open simultaneously
• Recommended: 3 to 10
• Example: 5

Purpose:

• Prevents over-trading
• Manages portfolio concentration
• Controls margin usage
• Limits exposure

Behavior:

• When limit is reached, no new positions can be opened
• Existing positions can still be closed
• Limit applies per algorithm (not account-wide)

Example:

{
  "maxOpenPositions": 5
}

Algorithm can have maximum 5 positions open at once.

Considerations:

Account Size:

• Small accounts (< ₹1L): 1-3 positions
• Medium accounts (₹1L-10L): 3-10 positions
• Large accounts (> ₹10L): 10-50 positions

Strategy Type:

• Scalping: 1-3 (quick in/out)
• Day Trading: 3-5 (active management)
• Swing Trading: 5-10 (longer holds)
• Position Trading: 10-20 (diversification)

Margin Requirements:

• Intraday: Higher leverage, can handle more positions
• Delivery: Full capital required, fewer positions
• Futures/Options: Margin-based, moderate positions

Risk Profiles:

// Conservative
{
  "maxOpenPositions": 3
}

// Moderate
{
  "maxOpenPositions": 5
}

// Aggressive
{
  "maxOpenPositions": 10
}

---

riskRewardRatio

• Type: number
• Required: Yes
• Range: 1.0 to 10.0
• Description: Minimum risk-reward ratio required for trades
• Recommended: 2.0 to 3.0
• Example: 2.0

Purpose:

• Ensures profitable strategy design
• Validates exit conditions
• Enforces disciplined trading

Calculation:

Risk-Reward Ratio = Potential Profit / Potential Loss
                  = (Take Profit - Entry) / (Entry - Stop Loss)

Example:

{
  "riskRewardRatio": 2.0
}

With ₹500 entry:

• Stop Loss: ₹490 (₹10 risk)
• Take Profit: ₹520 (₹20 reward)
• Ratio: ₹20 / ₹10 = 2:1 ✅

Minimum Win Rate Required:

For break-even (after costs):

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

Risk-Reward	Min Win Rate	Example
1:1	50%	Need to win half the time
2:1	33%	Need to win 1 in 3 trades
3:1	25%	Need to win 1 in 4 trades
5:1	17%	Need to win 1 in 6 trades

Recommended Ratios:

• Minimum: 1:1 (break-even after costs)
• Good: 2:1 or 3:1 (profitable with moderate win rate)
• Excellent: 5:1+ (profitable with low win rate)

Strategy Considerations:

• High win rate strategies (60%+): Can use 1:1 or 1.5:1
• Medium win rate strategies (40-60%): Use 2:1 or 3:1
• Low win rate strategies (<40%): Use 3:1 or higher

---

Complete Examples

Conservative Profile

{
  "maxPositionSize": 2.0,
  "stopLoss": 1.0,
  "takeProfit": 3.0,
  "maxDailyLoss": 2000,
  "maxOpenPositions": 3,
  "riskRewardRatio": 3.0
}

Characteristics:

• Small position sizes (2% max)
• Tight stop loss (1%)
• High risk-reward (3:1)
• Low daily loss limit (2% of ₹100k account)
• Few positions (3 max)
• Suitable for: Beginners, small accounts, volatile markets

---

Moderate Profile

{
  "maxPositionSize": 5.0,
  "stopLoss": 2.0,
  "takeProfit": 4.0,
  "maxDailyLoss": 5000,
  "maxOpenPositions": 5,
  "riskRewardRatio": 2.0
}

Characteristics:

• Medium position sizes (5% max)
• Standard stop loss (2%)
• Good risk-reward (2:1)
• Moderate daily loss limit (5% of ₹100k account)
• Moderate positions (5 max)
• Suitable for: Experienced traders, medium accounts, normal markets

---

Aggressive Profile

{
  "maxPositionSize": 10.0,
  "stopLoss": 3.0,
  "takeProfit": 6.0,
  "maxDailyLoss": 10000,
  "maxOpenPositions": 10,
  "riskRewardRatio": 2.0
}

Characteristics:

• Large position sizes (10% max)
• Wider stop loss (3%)
• Standard risk-reward (2:1)
• High daily loss limit (10% of ₹100k account)
• Many positions (10 max)
• Suitable for: Professional traders, large accounts, trending markets

---

Scalping Profile

{
  "maxPositionSize": 5.0,
  "stopLoss": 0.5,
  "takeProfit": 1.0,
  "maxDailyLoss": 3000,
  "maxOpenPositions": 2,
  "riskRewardRatio": 2.0
}

Characteristics:

• Tight stops (0.5%)
• Quick profits (1%)
• Low daily loss (3% of ₹100k account)
• Few positions (2 max, quick turnover)
• High frequency trading

---

Swing Trading Profile

{
  "maxPositionSize": 8.0,
  "stopLoss": 5.0,
  "takeProfit": 15.0,
  "maxDailyLoss": 8000,
  "maxOpenPositions": 8,
  "riskRewardRatio": 3.0
}

Characteristics:

• Wider stops (5%)
• Larger profits (15%)
• Higher daily loss (8% of ₹100k account)
• More positions (8 max, longer holds)
• Lower frequency trading

---

Validation Rules

General Validation

• All required fields must be present
• All values must be within specified ranges
• takeProfit should be greater than stopLoss (if specified)

Specific Validations

maxPositionSize:

• Must be between 0.01 and 100
• Should not exceed 20% for most strategies
• Warning if > 10% (high risk)

stopLoss:

• Must be between 0.1 and 50
• Should be appropriate for strategy type
• Warning if < 0.5% (too tight) or > 10% (too wide)

takeProfit:

• Must be between 0.1 and 100
• Should be >= stopLoss for positive risk-reward
• Warning if < stopLoss (negative risk-reward)

maxDailyLoss:

• Must be between 100 and 10,000,000
• Should be 1-10% of account balance
• Warning if > 10% of account (very aggressive)

maxOpenPositions:

• Must be between 1 and 50
• Should consider account size and margin
• Warning if > 20 (difficult to manage)

riskRewardRatio:

• Must be between 1.0 and 10.0
• Should be at least 1.5 for profitability
• Warning if < 1.5 (requires very high win rate)

Risk Management Best Practices

1-2% Risk Rule

Never risk more than 1-2% of account on a single trade:

{
  "maxPositionSize": 5.0,
  "stopLoss": 2.0
}

With risk-based sizing at 1.5%, actual risk per trade is 1.5%.

Portfolio-Level Risk

Consider total exposure across all positions:

Total Risk = Number of Positions × Risk Per Position

With 5 positions at 1.5% risk each:

• Total Risk = 5 × 1.5% = 7.5%

Correlation Considerations

• Avoid multiple positions in highly correlated symbols
• Diversify across sectors and asset classes
• Monitor portfolio beta and correlation

Circuit Breaker System

• maxDailyLoss acts as circuit breaker
• Prevents emotional trading after losses
• Allows cool-down period
• Protects against cascading failures

Position Sizing Hierarchy

1. Position Sizing Method calculates size
2. maxPositionSize caps the size
3. Risk Parameters validate the trade
4. Margin requirements apply
5. Final position size determined

Related Documentation

• Algorithm Structure - Complete algorithm schema
• Position Sizing Schema - Position sizing configuration
• Exit Conditions Schema - Exit rules configuration
• Risk Management Principles - Detailed risk management guide
• How to Configure Risk Parameters - Step-by-step guide