Risk Management in Automated Trading
A common misconception is that automated trading is "passive income." You turn it on, go to the beach, and come back to money. This is false. Automation is a tool, and like a chainsaw, it can cut you if you don't respect it.
The Golden Rule: Protect the Capital
Your number one job as a trader is not to make money; it is to protect your capital. Without capital, you are out of business.
1. The Daily Loss Limit (DLL)
Every single bot you run must have a hard Daily Loss Limit. This is your "circuit breaker." If the bot loses $X amount (e.g., 2% of your account), it MUST stop trading for the day. No exceptions. This prevents a bad market day from becoming a catastrophic one.
2. Leverage Management
Just because you can trade 10 contracts doesn't mean you should. Over-leveraging is the fastest way to blow an account. We recommend starting with Micro contracts (MES/MNQ) until you have built a profit buffer.
- Account < $10k: Trade Micros only.
- Account > $25k: Consider Mini contracts (ES/NQ) cautiously.
3. Correlation Risk
If you run a trend-following bot on the S&P 500 and another on the Nasdaq, realize that you are essentially doubling down on the same bet. If the market reverses, both bots lose. Diversify your portfolio by running non-correlated strategies (e.g., one Trend bot and one Mean Reversion bot).
The "Kill Switch"
At YMI, we teach our members to monitor market conditions. If a major news event (like FOMC or CPI) is releasing, we often turn our bots OFF. Volatility during these events is unpredictable and often purely random. Cash is a position.
Risk Disclosure & Disclaimer
Educational Purposes Only: The content provided in this blog is for educational and informational purposes only. It does not constitute financial, investment, or trading advice. Young Money Investments is not a registered investment advisor, broker-dealer, or financial analyst.
Risk Warning: Trading futures, forex, stocks, and cryptocurrencies involves a substantial risk of loss and is not suitable for every investor. The valuation of futures, stocks, and options may fluctuate, and as a result, clients may lose more than their original investment.
CFTC Rule 4.41 - Hypothetical or Simulated Performance Results: Certain results (including backtests mentioned in these articles) are hypothetical. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.
Testimonials: Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.
