In the fast-paced world of algorithmic trading, where strategies are executed at lightning speed, the importance of understanding the risks associated with different trading strategies cannot be overstated. To empower our users with valuable insights and enhance their decision-making process, we are excited to introduce Risk Labels on our algorithmic trading-based social trade platform. In this post, we will explain the metrics and factors that contribute to these Risk Labels and how they can guide you toward making informed choices.
Marketplace Risk Labels are designed to provide a clear and concise overview of the risk associated with each algorithmic trading strategy on our platform. These labels are derived from a comprehensive analysis of various metrics, which include:
Stop Loss and Leverage
The first metric takes into account the strategy's Stop Loss and the leverage used. The formula 1 - (strategy's stop loss * leverage) / 100 helps gauge the potential loss that the strategy could incur in relation to its leverage. A lower value indicates a more conservative approach, while a higher value suggests a higher level of risk.
Maximum Drawdown
Maximum drawdown is a crucial measure of risk that assesses the largest drop in the value of an investment from its peak to its trough. A strategy's maximum drawdown is factored into the risk assessment, with a higher drawdown contributing to a higher risk rating.
The formula used for maximum drawdown is: 1 + (4 * maximum drawdown / 100)
Exit Algorithm Logic
Strategies with a well-defined exit algorithm logic tend to have more controlled risk. This factor rewards strategies that are equipped with mechanisms to mitigate losses and exit positions strategically.
If there is an exit algorithm in the strategy, this would give the strategy +1 point on risk assessment.
Strategy Lifetime
Lifetime plays a role in assessing risk as well. If a strategy has been on the marketplace for more than a month, it receives a small positive adjustment to its risk score. This factor acknowledges that strategies with a track record are relatively more predictable.
The lifetime score is calculated as:
Strategy is on the marketplace for more than 30 days = +0.05 Points
Strategy is on the marketplace for more than 90 days = +0.10 Points
Strategy is on the marketplace for more than 180 days = +0.15 Points
Strategy is on the marketplace for more than 360 days = +0.20 Points
Strategy Creator’s Experience
The experience of the strategy creator is considered an important indicator of risk. If the creator holds a publisher account for more than a month, a small positive adjustment is made to the strategy's risk score. This reflects that experienced releasers tend to exhibit better risk management.
The strategy score is calculated as:
Creator is on the marketplace for more than 30 days = +0.05 Points
Creator is on the marketplace for more than 90 days = +0.10 Points
Creator is on the marketplace for more than 180 days = +0.15 Points
Creator is on the marketplace for more than 360 days = +0.20 Points
Translating Metrics into Risk Segments
After calculating the scores according to the above-mentioned categories, they are summed and risk labels are created.
1. Low Risk
Strategies in the low-risk segment exhibit characteristics of conservative risk management. They often have tighter stop-loss thresholds, lower leverage, and well-defined exit algorithms. These strategies are ideal for users seeking more stability and are willing to trade off potentially lower returns for increased safety.
If the calculated score is greater than 2, the strategy labeled as “Low Risk”
2. Mid Risk
Strategies classified as mid-risk strike a balance between potential returns and risk exposure. They might have moderate stop-loss and leverage settings and possess some level of exit algorithm logic. These strategies cater to traders who are open to a moderate level of risk in pursuit of relatively higher returns.
If the calculated score is between 2 and 1, the strategy labeled as "Mid Risk"
3. High Risk
High-risk strategies are designed for traders who are comfortable with elevated risk levels in exchange for potentially higher rewards. These strategies might have looser stop-loss settings, higher leverage, and may lack comprehensive exit algorithm logic. They are suited for experienced traders who understand and are prepared for the volatility associated with such approaches.
If the calculated score is less than 1, the strategy labeled as "High Risk"
4. N/A
If there is not enough data to create a risk assessment of the strategy, the risk label of the strategy is set as "N/A"
Using Risk Labels to Your Advantage
As an algorithmic trading enthusiast, you now have a powerful tool at your disposal. The Risk Labels help you quickly assess the risk profile of each strategy, allowing you to align your investment goals with your risk tolerance. Whether you are aiming for consistent gains or are willing to take on more risk for the chance of larger profits, these labels enable you to make more informed decisions.
For more information and detailed insights on our Risk Labels and the underlying metrics, feel free to explore our comprehensive knowledge base or get in touch with our dedicated support team.