Risk Management in Algorithmic Trading
8 min read · TANO Research
Risk policy is not part of the model
A robust design principle in systematic trading is separation: the model proposes, the risk layer disposes. The engine that finds opportunities should not also be the final authority on how much capital those opportunities receive.
TANO enforces this structurally. Strategies emit intentions; an independent risk engine applies position limits, exposure caps and drawdown policy before any order reaches a venue. A model cannot vote itself more capital.
Position sizing
Sizing determines whether a strategy survives its own losing streaks. Fixed-fractional sizing — risking a small, defined fraction of equity per position — keeps any single trade from dominating outcomes. Kelly-style approaches can be optimal in theory but are fragile in practice because they depend on edge estimates that are themselves uncertain.
Conservative sizing feels slow in winning periods. It is the price of still being solvent during the losing ones.
Drawdown limits and de-risking
Every strategy has a drawdown budget: a maximum peak-to-trough decline it is allowed to sustain. When losses approach that budget, the correct response is mechanical — reduce exposure, tighten stops, or stand down entirely — not a debate in the moment.
Automated de-risking removes the two most dangerous human impulses: revenge trading after losses and doubling down to 'get back to even'.
Kill switches and operational risk
Model risk is only half the picture. Feeds fail, venues halt, APIs degrade. Operational safeguards — heartbeat monitoring, stale-data detection, automatic pause on anomalies and operator-controlled kill switches at bot, strategy and platform level — bound the damage when infrastructure misbehaves.
The honest summary: automation does not remove risk. It makes risk policy explicit, testable and consistently enforced.
This article is educational material, not investment advice. Digital assets are volatile and you can lose money. Read the risk disclosure before allocating.
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