Risk management – your safety belt
After your algorithm has generated a trading signal, it should go past risk management. While trading logic answers the question to trade or not to trade, risk management answers another question: how much should be put at stake?
In basic terms, risk management involves analysis of the potential maximum adverse excursion per trade, account size, leverage and margin as financial components of risk, and macro-economic factors and political events as external and non-market risk. Just to give you an example, it would be wise to just switch off trading before the Swiss National Bank decision in January 2015 or the presidential elections in the US in 2016.
The topic of risk management is really vast and we will go into detail on this later in Chapter 10, Types of Orders and Their Simulation in Python, after we have learned more about types of trading strategies and orders.
