Layers of risk management
A typical systematic trading approach might include some or all of the following tools for managing risk.
Portfolio level:
Portfolio, system, and time frame diversification
Trading different markets.
Trading different systems.
Trading on different time frames.
Halting trading if and when account equity experiences an x-percent drawdown.
System level:
Allocating a fixed percentage of equity for each position to equalize per-trade risk.
Capping the number of positions/risk for different sectors and/or all markets.
Risk balancing among portfolio components (ensuring each trade represents the same risk to the portfolio.
Trade level:
Predefined stop-loss and profit-target levels.
