Risk Management

Overview

Risk management is the most important aspect of automated trading. Playground provides several tools to help you protect your capital and trade responsibly. Always use these features to limit your downside and preserve capital for future opportunities.

Daily Loss Limits

Daily loss limits automatically pause your strategy if losses exceed a specified amount in a 24-hour period.

How It Works

• •Set Limit — Specify maximum loss in dollars (e.g., $50)
• •Tracking — System tracks realized P&L from settled positions
• •Automatic Pause — Strategy stops trading when limit is hit
• •Reset — Limit resets after 24 hours from first loss
• •Manual Resume — You can manually resume trading before 24 hours if desired

Recommended Limits

• •Conservative — 2-5% of total trading capital per day
• •Moderate — 5-10% of total trading capital per day
• •Aggressive — 10-20% of total trading capital per day (not recommended for beginners)
• •Example — $1,000 capital, conservative = $20-50 daily loss limit

Trade Caps

Trade caps limit the number of trades your strategy can place in a 24-hour period.

How It Works

• •Set Cap — Specify maximum number of trades per day (e.g., 10 trades)
• •Counting — Each triggered trade (entry order placed) counts toward the cap
• •Automatic Pause — Strategy stops trading when cap is reached
• •Reset — Cap resets after 24 hours from first trade

Recommended Caps

• •15-Minute Strategies — 10-20 trades per day (markets open every 15 minutes = 96 opportunities)
• •1-Hour Strategies — 5-10 trades per day (markets open every hour = 24 opportunities)
• •Conservative — Cap at 10-20% of total opportunities
• •Aggressive — Cap at 30-50% of total opportunities

Why Use Trade Caps?

Trade caps prevent overtrading and help control costs:

• •Prevent Overtrading — Stops strategy from placing too many trades during volatile periods
• •Control Costs — Limiting trades helps manage overall trading costs
• •Reduce Correlation — Too many trades in a short period may be highly correlated (all win or all lose)
• •Capital Preservation — Limits total capital at risk in a single day

Position Limits

Position limits control the size of individual positions to prevent oversized exposure.

Maximum Position Shares

Limit the number of shares in a single position.

• •Set Limit — Specify maximum shares per position (e.g., 500 shares)
• •Enforcement — Strategy will not place orders that would exceed this limit
• •Use Case — Prevent accumulating too many shares in a single market

Maximum Position Dollar Value

Limit the dollar value of a single position.

• •Set Limit — Specify maximum dollar value per position (e.g., $100)
• •Enforcement — Strategy will not place orders that would exceed this value
• •Use Case — Cap total capital at risk in any single market

Position Sizing

Position sizing is the most important risk management decision. It determines how much capital you risk on each trade.

Fixed Dollar Amount

Risk the same dollar amount on every trade (simplest approach).

• •Method — Set budget per trade to a fixed amount (e.g., $10)
• •Pros — Simple, predictable, easy to calculate risk
• •Cons — Doesn't scale with account size
• •Best For — Beginners, small accounts

Percentage of Capital

Risk a fixed percentage of your trading capital on each trade.

• •Method — Set budget per trade to X% of capital (e.g., 2%)
• •Example — $1,000 capital, 2% = $20 per trade
• •Pros — Scales with account size, preserves capital during drawdowns
• •Cons — Requires manual adjustment as capital changes
• •Best For — Intermediate traders, growing accounts

Kelly Criterion (Advanced)

Mathematically optimal position sizing based on your edge and win rate.

• •Formula — Kelly % = (Win Rate × Avg Win - Loss Rate × Avg Loss) / Avg Win
• •Example — 55% win rate, 1.5x avg win, 1x avg loss → Kelly = 16.67%
• •Recommendation — Use 1/4 to 1/2 Kelly (4-8% in example above) to reduce volatility
• •Pros — Maximizes long-term growth rate
• •Cons — Requires accurate win rate and profit/loss estimates, can be aggressive
• •Best For — Advanced traders with proven edge

Risk Per Trade

Understanding how much you actually risk on each trade is crucial for proper risk management.

Calculating Risk

Your risk per trade depends on your entry price:

• •Entry at 30¢ — Risk: 30¢ per share (if wrong, shares go to $0)
• •Entry at 50¢ — Risk: 50¢ per share (maximum loss)
• •Entry at 70¢ — Risk: 70¢ per share (higher risk, lower reward)
• •Example — Budget $10, entry 30¢ → Buy 33 shares, risk $10 (33 × $0.30)

Risk-Reward Ratio

Compare your potential profit to your risk:

• •Entry 30¢, Exit 99¢ — Risk $0.30, Reward $0.69, R:R = 1:2.3 (good)
• •Entry 50¢, Exit 99¢ — Risk $0.50, Reward $0.49, R:R = 1:0.98 (poor)
• •Entry 10¢, Exit 99¢ — Risk $0.10, Reward $0.89, R:R = 1:8.9 (excellent)
• •Recommendation — Aim for at least 1:2 risk-reward ratio

Diversification

Diversification reduces risk by spreading capital across multiple assets and strategies.

Multi-Asset Diversification

Trade multiple cryptocurrencies to reduce single-asset risk:

• •Single Asset — All eggs in one basket - if BTC has a bad day, you lose
• •Multi-Asset — Spread across BTC, ETH, SOL, XRP - reduces correlation
• •Example — BTC down 5%, ETH flat, SOL up 3%, XRP up 2% → Net: flat to slightly positive
• •Recommendation — Trade at least 2-3 assets for diversification

Strategy Diversification

Run multiple strategies with different approaches:

• •Momentum Strategy — Trades with the trend (RSI, MACD)
• •Mean Reversion Strategy — Trades against extremes (Bollinger Bands)
• •Always Trade Strategy — Consistent participation without conditions
• •Benefit — Different strategies profit in different market conditions

Timeframe Diversification

Trade 5-minute (BTC only), 15-minute, and 1-hour markets:

• •15-Minute Markets — More opportunities (96/day), faster feedback, higher frequency
• •1-Hour Markets — Fewer opportunities (24/day), less noise, longer trends
• •Benefit — Reduces correlation between trades, smooths equity curve

Best Practices

Follow these best practices to trade responsibly and protect your capital:

Start Small

• •Begin with Minimum — Start with $5-10 per trade to learn how your strategy performs
• •Paper Trade First — Run your strategy for a week to see results before increasing size
• •Scale Gradually — Increase position size by 25-50% at a time, not double or triple
• •Prove Your Edge — Only increase size after 50+ trades with positive results

Use Stop Losses

• •Daily Loss Limit — Always set a daily loss limit (2-5% of capital)
• •Trade Cap — Limit trades per day to prevent overtrading
• •Review Regularly — Check performance daily, pause if strategy underperforms

Monitor Performance

• •Track Win Rate — Aim for 50%+ win rate (varies by strategy)
• •Track Profit Factor — Total wins / Total losses. Aim for 1.5+ (win $1.50 for every $1 lost)
• •Track Drawdown — Maximum peak-to-trough loss. Keep under 20-30% of capital
• •Adjust or Pause — If metrics deteriorate, pause and review your strategy

Avoid Common Mistakes

• •Overleveraging — Don't risk more than 2-5% per trade
• •Chasing Losses — Don't increase size after losses to "get even"
• •Ignoring Costs — Trading costs add up over time. Factor into your edge calculation
• •No Risk Management — Always use daily loss limits and trade caps
• •Overtrading — More trades ≠ more profit. Quality > quantity