PROs and CONs of Commercial Expert Advisors Trading Strategy Analysis Trading Strategy Analysis

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.


Change from fixed VaR to variable VaR in the DARWIN assets

Photo by ManelTor / CC BY


On January 11th 2020 we will be making changes in the way in which the Darwinex risk manager works.

Here we will explain:

  1. The reason for the change
  2. The operation of the new manager
  3. The effects achieved
  4. The implementation of the change
  5. Appendix: Examples of popular DARWINs

1. What the reason for the change is

The risk manager is in charge of ensuring that all DARWIN assets trade with a known risk, regardless of the risk taken on by the underlying strategy on which the logic for market entry and exit decisions is based.

This means that the DARWIN replicates the asset and the timing of the trader’s operation, but investor volume is defined by Darwinex through the risk management logic. The manager’s involvement thus makes the respective returns of the underlying strategy and of the DARWIN different.

As of today, all DARWINs have the same target risk – 10% monthly VaR. Setting it at a given value and not allowing it to be variable has a series of benefits.

  • It makes it possible to compare DARWIN returns in a very intuitive way.
  • The investor knows the risk of any DARWIN portfolio composition at any given time.
  • It counters the bias of many traders who, for emotional reasons, are unable to take on significant investment amounts and, to protect themselves, lower their strategy risk, even though there is no evidence that their predictive capacity has worsened.
  • It removes the statistical illusion of trading strategies whose performance is mainly based on the gradual use of leverage, such as more aggressive martingales, which are so widespread in copytrading.
  • It makes it easier to estimate the maximum capacity that a DARWIN can absorb, that is, the maximum investment that it can manage without impairing its investors’ returns too much.
  • It makes it possible to apply management fees adjusted to the potential returns of the DARWIN in question.

However, in addition to these features, the risk manager should be as least “intrusive” in a trader’s strategy as possible, so that the trader does not feel that the risk manager is harming their investors. Otherwise, the best managers will be unwilling to provide their systems to our market.

In the past, we received many complaints along these lines. Many of them were baseless, or only came when the trader was harmed, but we were not thanked when it was the other way round (that’s the human condition).

Obviously, we must continue to improve the risk manager to make it less “intrusive”, but it’s hard to establish what that means.

After compiling feedback, we have reached the conclusion that many traders do not always trade with the same risk. There may be long periods (even 1 year long, but usually 1-6 months) in which the trader, because they believe that their system will not perform well due to market conditions, because they are making adjustments, or for any other reason, lowers their risk.

If these periods in which traders lower their risk last more than 45 days (the benchmark period used to calculate the underlying strategy VaR), at the end they significantly lower the benchmark VaR calculated by the platform. Then the DARWIN multiplies the trader’s leverage by a higher factor than usual, and consequently there is a sudden loss of proportionality between the underlying strategy and the DARWIN.

If the trader was right and their strategy does not perform well during that period, the DARWIN will lose significantly more than the underlying strategy with respect to its usual performance (if the trader was not right, the opposite would be the case, obviously).

Most traders are UNABLE to predict the market. Consequently, lowering their risk usually generates a random performance from the DARWIN. The problem is that it is precisely the best traders who ARE ABLE to adjust their risk to market conditions.

We have reached the conclusion that the risk manager should cease to have a fixed VaR to adjust better to the best traders when, for whatever reason, they believe that it is better to lower their strategy risk for reasonably short periods (less than 6 months).

Having said this, risk should fall within a range – otherwise, we would cease to comply with the rest of reasons why we preferred to make it fixed.

2. The operation of the new manager

With this change, DARWIN risk becomes variable, between 5% and 10%.

To determine the target VaR, historical VaR data is taken into account, starting with the most recent data with a look-back window of maximum 6 months, until the ratio between maximum and minimum VaR is 2:1.

The current VaR then gets divided by the maximum VaR calculated before. Last, this ratio gets multiplied by 10%. The resulting VaR will move between 5% and 10%.

Should there be no 2:1 ratio in the last 6 months, the maximum in the last 6 months is taken into account.

2.1 Examples

Current VaR: 8%
Maximum VaR: 12% one month ago
Minimum VaR: 6% five months ago
Target VaR: (8%/12%)*10%=6.67%

Current VaR: 9%
Maximum VaR: 14% 2 months ago
Minimum VaR: 8% in the last 6 months
Target VaR: (9%/14%)*10%=6.43%

In summary, the Risk Manager tolerates changes in Var up to 2 times (rises or falls) with the aim to better adapt to the trader’s risk management.

2.2 Additional change

To protect investors from abnormally high leverage, there is an additional control measure that does not allow investors’ D-Leverage to exceed in any case the 20-15-15 threshold for 15 min-30 min-1 hour positions.

This restriction mainly affects short-term DARWINs, or DARWINs that use short-term leverage peaks.

This change also makes that the DARWIN and the underlying strategy look more “similar” in shape.

3. The effects achieved

DARWIN performance at times of drawdown is significantly improved, without penalising too much total returns when the DARWIN is recovered. That is, an improvement in the return/drawdown ratio is achieved, and above all, we achieve greater similarity in DARWIN performance with respect to the medium-term risk decisions of the underlying strategies.

To better understand the impact of the change in the risk manager on DARWINs, we will give a very illustrative example. This is LZB, backtested using the current and the new manager. In both cases, a backtest is used because we have no real data using the new manager, and so the comparison is better using the same trading data (backtest).



Blue: Darwin backtest with the current risk manager
Red: Darwin backtest with the new risk manager


LZB underlying

LZB underlying strategy curve


The example shows that the current risk manager is responsible for the strategy drawdown being hugely amplified in the DARWIN, and later the strategy recovery is not apparent to the same extent in the DARWIN. This is an obvious case in which the current Darwinex manager damaged the strategy.

By contrast, the new manager, by offering a lower risk (between 5% and 10%) is able to perfectly replicate the proportionality with the underlying strategy.

4. Implementation

The change will be automatically implemented. Neither traders nor investors need do anything.

Investible attributes will continue to function, at least for the time being, as though the VaR were still fixed and 10%. This has implications for certain notes, but they may take a long time to change, and we have opted to make the risk manager our priority.

Past graphs and charts won’t be recalculated.

5. Appendix: More examples of popular DARWINs


LVS, last 2 years






SYO since migration






ULI last 3 years



WSS last year






NTI last 3 years



ZVQ since migration

For discussion and feedback on this change, we invite you to visit this community post.