Effective risk management is crucial for successful trading. Developed by Dr. Glen Brown, the Global Algorithmic Trading Software (GATS) provides a powerful tool for managing risk in a systematic and disciplined manner. This guide outlines the core risk management principles and strategies employed by GATS, including the 2% and 6% rules, as well as the default conservative risk management system.
- Core Risk Management Principles
a. The 2% Rule: Never risk more than 2% of your account equity in any given trade. This rule helps to limit potential losses and preserve your trading capital.
b. The 6% Rule: Your total risk at any point in time must not exceed 6% of your trading capital. This rule ensures that your overall exposure to risk is manageable and sustainable.
- GATS Default Conservative Risk Management System
The GATS Default Conservative Risk Management System employs nine different subsystems, each with a specific default risk level and trailing stop loss. These settings help control your risk exposure based on your account’s free equity and the average true range (ATR) of the instrument being traded.
a. GATS1: Default Risk = 0.01% of free Equity; Trailing Stop Loss = 27ATR200
b. GATS5: Default Risk = 0.02% of free Equity; Trailing Stop Loss = 24ATR200
c. GATS15: Default Risk = 0.03% of free Equity; Trailing Stop Loss = 21ATR200
d. GATS30: Default Risk = 0.04% of free Equity; Trailing Stop Loss = 18ATR200
e. GATS60: Default Risk = 0.05% of free Equity; Trailing Stop Loss = 15ATR200
f. GATS240: Default Risk = 0.06% of free Equity; Trailing Stop Loss = 12ATR200
g. GATS1440: Default Risk = 0.07% of free Equity; Trailing Stop Loss = 9ATR200
h. GATS10080: Default Risk = 0.08% of free Equity; Trailing Stop Loss = 6ATR200
i. GATS43200: Default Risk = 0.09% of free Equity; Trailing Stop Loss = 3ATR200
- Portfolio Risk Management
By activating all nine subsystems on any financial instrument, the maximum risk per portfolio is 0.45% (sum of default risk levels). This risk level is acceptable and allows for a methodology where positions are added after reaching a break-even point.
- Customizing Risk Models
Feel free to design additional risk models to suit your trading style while using the GATS. Always keep the 2% and 6% rules in mind when developing your models to ensure your risk exposure remains within acceptable limits.
By adhering to the 2% and 6% rules and utilizing the GATS Default Conservative Risk Management System, traders can effectively manage their risk exposure and protect their trading capital. Customize your risk models as needed, but always remain mindful of these fundamental risk management principles to ensure long-term success in your trading endeavors.
- Risk management approach: The risk model’s approach of using multiple subsystems with different risk levels and trailing stop losses is a sensible way to manage risk. It allows traders to diversify their risk exposure across different timeframes and market conditions, which can help reduce the impact of adverse price movements.
- Adherence to the 2% and 6% rules: The maximum risk per portfolio (0.45%) falls well within the 6% rule, ensuring that the overall exposure to risk is manageable. However, it’s essential to monitor individual trades to ensure that they don’t violate the 2% rule.
- Trailing stop losses: The use of Average True Range (ATR) for setting trailing stop losses is a robust approach. ATR-based stop losses can adapt to changing market conditions and volatility, offering better protection for trades compared to fixed stop losses.
- Customization: Allowing traders to create additional risk models to suit their trading style is a valuable feature. This flexibility can help them better manage their risk exposure based on their individual risk tolerance and trading strategy.
- Room for improvement: While the default risk model provides a good starting point for managing risk, it’s important to consider other factors, such as position sizing, correlation between instruments, and market conditions, when developing a comprehensive risk management strategy.
Overall, the GATS Default Conservative Risk Management System is a well-designed and adaptable risk model that adheres to important risk management principles. However, it’s crucial to consider other factors and tailor the model to your specific trading needs to maximize its effectiveness in managing risk.