Risk Management

All financial markets share the trait of unpredictability. Although there are techniques that attempt to estimate future price movements, the reality is that it is not possible to predict the future. The only thing that can be predicted with absolute certainty is how much one is willing to put risk on each trade or the entire trading project. This fundamental principle of risk management is crucial for any trader, whether beginner or experienced.

You might have noticed that in all the algorithms we have written so far, we have mainly focused on entries. That is, we have created algorithms to identify trends, reversals, or trend pullbacks to open trades, but all trades have been managed with a simple holding period. This approach has helped us better focus on entry patterns, but now it is time to complete the development of our strategies by starting to manage the risk associated with trading.

Managing risk in trading strategies has two aspects: handling exits...