Risk Management

Risk Management

Portfolio-level risk controls for crypto and Solana trading. This skill provides frameworks for drawdown management, exposure limits, circuit breakers, and crypto-specific risk considerations.

Risk Management Hierarchy

Every decision must respect this priority order:

1. Survival — Never risk account ruin. No single trade, day, or week should threaten your ability to continue trading.
2. Capital preservation — Protect what you have. Losses compound geometrically; recovery requires outsized gains.
3. Growth — Only after survival and preservation are secured, pursue returns.

Violating this hierarchy (chasing growth at the expense of survival) is the primary cause of account blowups.

Portfolio-Level Controls

1. Maximum Drawdown Limits

Halt trading when portfolio drawdown from equity peak reaches a threshold:

Recovery math makes this critical: a -20% drawdown requires +25% to recover. A -50% drawdown requires +100%. See references/drawdown_management.md for the full recovery table.

2. Daily Loss Limits

Stop opening new positions after daily P&L (realized + unrealized) hits:

• Conservative: -3% of account
• Moderate: -4% of account
• Aggressive: -5% of account

Reset at midnight UTC. Three consecutive days hitting the daily limit triggers a weekly halt.

3. Weekly Loss Limits

Reduce size or halt after weekly P&L reaches:

• Reduce size by 50%: -5% weekly loss
• Minimum size only: -7% weekly loss
• Full halt: -10% weekly loss

4. Concentration Limits

Maximum allocation to any single dimension:

5. Exposure Limits

Total deployed capital constraints:

• Normal conditions: 50–80% deployed, 20–50% cash reserve
• Elevated risk: 30–50% deployed
• Drawdown >10%: 20–30% deployed
• Max concurrent positions: 5–10 depending on account size

6. Correlation Management

Crypto assets correlate >0.7 during sell-offs. Effective diversification requires:

• Treat all meme tokens as a single correlated bucket
• Limit total meme exposure to one position-size equivalent
• Diversify across strategies (trend, mean-reversion, scalp), not just tokens
• Monitor rolling correlation and reduce when correlations spike

See references/exposure_limits.md for detailed limits by token type and strategy.

Drawdown Management

Response Framework

Recovery Requirements

The asymmetry accelerates rapidly. Managing small drawdowns prevents them from becoming catastrophic. See references/drawdown_management.md for the full framework.

Circuit Breakers

Automated controls that restrict trading when conditions are met:

Time-Based

• No trading for 24 hours after hitting daily loss limit
• 48-hour cooling period after weekly loss limit
• Mandatory weekly review day (no new positions)

Loss-Based

• 3 consecutive losses → reduce size 50%
• 5 consecutive losses → minimum size only
• 7 consecutive losses → halt 24 hours, full review

Volatility-Based

• Portfolio volatility >2× rolling average → reduce exposure 50%
• Market-wide liquidation events → pause all new entries
• Individual token volatility spike → exit or tighten stops

Emotional (Self-Assessed)

• Recognize tilt: anger after losses, urge to "make it back"
• FOMO: rushing entries without proper analysis
• Overconfidence: increasing size after a win streak without justification

See references/circuit_breakers.md for implementation details.

Risk Metrics

Value at Risk (VaR)

95th-percentile daily loss estimate using historical returns:

import numpy as np

def historical_var(returns: list[float], confidence: float = 0.95) -> float:
    """Calculate historical VaR at given confidence level."""
    sorted_returns = sorted(returns)
    index = int((1 - confidence) * len(sorted_returns))
    return abs(sorted_returns[index])

# Example: 95% VaR of 3.2% means on 95% of days, loss won't exceed 3.2%