RISK LIMITS & GUARDRAILS

Every strategy operates within guardrails that protect your capital. There are two types: soft (scale down the signal) and hard (reject or pause entirely).

Max Position Size

SoftDefault: 10%

Scales down the position to the maximum allowed. If signal returns 15% for AAPL, the position is capped to 10%.

Example: Signal: AAPL = 15% → Capped to 10%. The remaining 5% is redistributed proportionally.

Max Sector Concentration

SoftDefault: 35%

Scales down positions in the over-concentrated sector. Other sectors are unaffected.

Example: Technology sector at 40% (4 positions at 10% each) → Scaled to 35% (8.75% each).

Min Positions

HardDefault: 5

Rejects the entire signal if fewer than the minimum positions would be held. The previous portfolio is maintained.

Example: Signal returns only 3 symbols → Rejected. Portfolio stays at previous weights.

Max Drawdown Kill Switch

HardDefault: 20%

Pauses the deployment entirely when portfolio drawdown exceeds the threshold. Requires manual unpause.

Example: Portfolio at $82,000 from $100,000 peak (18% DD) → Next day drops to $79,000 (21% DD) → Deployment paused.

Daily Loss Kill Switch

HardDefault: 5%

Pauses the deployment for the remainder of the day when daily loss exceeds the threshold.

Example: Portfolio drops from $100,000 to $94,000 in one day (6% loss) → Trading halted for the day.

Consecutive Losses Kill Switch

HardDefault: 5 days

Pauses the deployment after N consecutive losing days. Requires manual review.

Example: 5 straight days of negative returns → Deployment auto-paused with alert notification.

Universe Check

HardDefault: N/A

Removes any symbols from the signal that are not in the tradeable universe. Remaining symbols are re-normalized.

Example: Signal includes DELISTED_STOCK → Removed. Weights redistributed to valid symbols.

Gross Exposure (Long-Short)

SoftDefault: 160%

Scales all positions proportionally when total long + short exposure exceeds the limit.

Example: Long 140% + Short 30% = 170% gross → Scaled to 160% (long 131.8%, short 28.2%).

Net Exposure (Long-Short)

SoftDefault: 100% to -10%

Adjusts positions when net exposure (long - short) falls outside the allowed range.

Example: Net exposure at 110% (above 100% max) → Long positions scaled down to bring net to 100%.

Short Position Cap (Long-Short)

SoftDefault: 5%

Caps individual short positions at the maximum allowed percentage.

Example: Short signal for AAPL at -7% → Capped to -5%.

Short Book Cap (Long-Short)

SoftDefault: 30%

Scales down all short positions proportionally when total short exposure exceeds the limit.

Example: Total short exposure at 35% → Scaled to 30% (each short position multiplied by 30/35).