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Trading Strategy Risk Management to Attract Investment Capital

Experienced traders know how important Risk management is. In fact, you’ll understand that it is likely the single most crucial aspect of trading. For this reason, most of Darwinexs’ Investible Attributes focus on some element of risk. 

Darwinexs’ Investible Attributes attempt to identify weak points in a trading strategy and give Investors and Traders alike metrics to allow them to make informed decisions. It is impossible to make sensible investment decisions without having a depth of informative material available. 

The importance of risk in trading and investment is also why Darwinex created the DARWIN Risk Engine. The Risk Engine actively monitors the underlying strategy and adjusts the risk on the corresponding DARWIN where necessary. 

In doing this, Darwinex is able to Target a Max monthly VAR (95%) of 6.5%. This process is vital for investors. It reassures them that the DARWIN they’re investing in has appropriate measures to control risk outside of the Traders own risk management processes. 

With this in mind, the Risk Engines seeks to analyse the trading account and monitor the deviation of an expected outcome. If it feels the trader is acting outside of what is expected, which increases the risk in a manner it feels is unacceptable, it will adjust the risk on the DARWIN accordingly. 

This action allows all DARWINs to be standardised meaning you can accurately compare them to one another. This comparison would not be possible ordinarily when comparing two very different strategies, hence why the Investible Attributes are so valuable. 

Risk Management using The Risk Adjustment (Ra) IA 

The (Ra) Investible Attribute measures the level of involvement the risk engine must take to achieve its target of a max 6.5% Var (95%). An underlying strategy with an unstable and unpredictable risk profile will require more intervention by the risk engine, thus providing the DARWIN with a low (Ra) score. 

Another important note regarding the risk engine is that it will intervene if the D-Leverage exceeds a set limit. This limit is ultimately for the protection of the investors capital. For those not familiar with D-Leverage, you can find out more here. A future post will cover D-Leverage in greater detail.  

A DARWIN is a financial Derivative. 

Darwinex has implemented numerous risk mitigation processes to protect investors money. But a DARWIN is still a financial derivative, and as such, you should take care when investing in derivatives. 

A derivative is a financial contract ‘derived’ from an underlying asset so that the price movements of the derivative and the underlying asset are highly correlated over time. 

The important detail to note here is that the above risk management processes DO NOT mitigate the risk of the underlying trading account, and as such, your capital is at risk. Remember to take care when choosing to invest in ANY derivative product, including DARWINs. 

If you have any questions or queries regarding investing in DARWINs, please do not hesitate to contact us. 

Darwinex provides an unmatched level of insight to its Traders and Investors.

For Traders

Having this level of analysis available without having to conduct rigorous tests is invaluable. It can save time and allow the trader to focus on the most pressing issues affecting their trading account. 

It also provides insight into metrics investors may use to base investing decisions on. This insight can allow the trader to adjust some aspects of their strategy to increase risk management and stability factors to make a DARWIN safer and thus more appealing to attract third-party capital. 

For Investors

Having an extra layer of risk mitigation can reassure investors that every step possible to protect their investments is taken. They will still have exposure to various market risks, but these are controlled as is reasonably practical. 

Another perk for investors is that Darwinex has third-party deposit protection on top of the FSCSs’ protection. This extra insurance means that your deposits are protected up to £1 million.  

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:

Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only. They are not to be construed as financial and/or investment advice.

risk ajustment graph

Changes to the Ra (Risk adjustment) graph

From now on the Ra (Risk adjustment) graph will show positions in the colour orange, in addition to the red and green which have been used up until now.

The aim of the Ra graph is to inform DARWIN manager and the investors of the amount and size of the adjustments which have been carried out by the risk manager.

It is important to remember that the leverage for the DARWIN position’s trades, whenever the risk manager doesn’t act, is always:

trader leverage * VaR (10%) / VaR trader (x%)

The manager can intervene for two reasons.

Positions in red

The positions in red are adjustments made by the manager because the trader has taken on more risk than usual compared with recent activity in the past.  As a consequence, the risk manager must intervene to avoid the DARWIN’s VaR going above 10%.  We consider these interventions to be the responsibility of the trader, and as such the Ra score is penalised, and in turn the D-Score.

Positions in orange

The manager can also intervene when the DARWIN leverage is excessive when using the previously mentioned formula, even when the global DARWIN risk for 1 month does not exceed a 10% VaR.

This happens when the underlying strategy always trades short term with relatively few trades a month.  In these instances, if there were no adjustment, the DARWIN could reach a leverage of over 30:1 in some cases.  This is dangerous for investors if in the time of the trade being open there is a very big movement on the underlyings (0.5% of movement on the underlying assets would result in a sudden loss of 15% on the DARWIN).

This is why there is a limit on the DARWIN leverage, meaning there are position which are closed without sticking to a target monthly VaR of 10%.

The leverage limits applied by Darwinex are the following:

  • For positions lasting less than 30 minutes, the maximum D-Leverage allowed will be 15.
  • If a position lasts between 30 and 60 minutes, the maximum D-Leverage that a DARWIN could open is 12.5.
  • Lastly, if the position lasts more than 60 minutes, the maximum D-Leverage would be 10.

These positions have always been adjusted, but they have never been shown on the Ra graph, creating confusion amongst our clients.

From now on, this will be shown in orange and will give an approximate indication of the adjustment carried out.  These adjustments, unlike the ‘red ones’, do not affect the score because we do not consider them to be a result of bad management by the trader.

Related article: What does the Risk Adjustment (Ra) attribute tell about a trading strategy / DARWIN?

Do you have any questions about the changes to the Ra graph? Do not hesitate to share them in the comments.