Risk Management in Quantitative Trading

Many investors ignore risk management when trading. However, when the market trend is opposite to the trading trend, risk management can be used to gain profits and losses can be minimized in counter-trend trading. How is this done? Mainly reflected in risk management methods, including stop loss, price limit and investment portfolio. Investors who do not use limit prices in their trades will expect the direction of the market to change, resulting in a situation where they hold positions at a disadvantage for too long.

How should investors manage risks during trading?Here are four suggestions:

1. Predetermine risks or risk exposures before entering the market.First of all, you must determine the risk you can bear. Under normal circumstances, the risk of each transaction cannot exceed 1% of the total account assets and 5% of the total account assets. This method can allow investors to maximize the protection of the account's net worth after several failures.

2. Choose the best stop loss level.There are many ways for investors to set up stop losses, generally there are three types, one is the average line, the other is to set support for long or short positions above or below the average line, and set a long stop loss at a slightly lower support position, or a slightly higher resistance. Use HR to set stop loss and adjust positions according to the ADR index. A diversified portfolio is as minimal as possible. When conducting multiple transactions, you must also ensure the correlation between them. The lower the correlation, the less risk the account will bear. When the market trend and the position direction are consistent, a highly correlated investment portfolio will undoubtedly double the income and become one direction.

3. Ensure the combination of risk control and emotional control.When a certain transaction is profitable, greed in human nature will prompt investors to continue to expand their positions, leading to the danger of short positions. A sophisticated investor can indeed increase his position from his current position, but at the same time he must also exercise tighter control over his risk.

4. Set a positive risk-benefit ratio.The risk-reward ratio refers to the price an investor is willing to pay and the reward he expects to receive in a transaction. Investors who adopt a positive risk-to-return ratio usually have higher returns than those who adopt a negative risk-to-return ratio. Even if only 50% of transactions are profitable, investors can obtain full benefits. In quantitative trading, risk management is an important part, and its safety and liquidity are the prerequisites and basis for realizing returns. Without guaranteed security and liquidity, it is impossible to obtain long-term, stable returns from trading.