Summary

In this chapter, we went through one of the most important aspects of algorithmic trading: risk management. We learned that managing risk involves two main components: managing exits and sizing positions, which is especially important for stock portfolio traders. Then, we delved into how to build exit trading algorithms according to different market logic and how to manage position sizes in both the presence and absence of technical exits. Keeping risk under control greatly increases traders’ confidence, and managing automated exits gives them the freedom to focus on the next entry.

Although these techniques allow for adaptive risk management on each trade based on both historical volatility and the varying volatility of assets, there remains a partial problem with gap risk. In the next chapter, we will explore 24-hour trading assets such as Futures and Forex, where the gap risk will be mitigated.