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Risk Framework

3.5 Risk and Position Sizing Framework​

3.5.1 Stop and Target Definition​

Stop and target levels are defined at signal activation using the ATR value on the signal bar.

Default configuration:

  • Stop distance = 1 × ATR
  • Target distance = 2 × ATR

ATR provides volatility normalization across instruments.

note

With the default configuration (1 × ATR stop and 2 × ATR target), the model operates with a 1:2 risk-to-reward structure.

Stop/Target Calculation (Pine Script)​

if isLongSignal
    stopPrice := close - atrVal * stopMult
    targetPrice := close + atrVal * targetMult
else
    stopPrice := close + atrVal * stopMult
    targetPrice := close - atrVal * targetMult

3.5.2 Expected Value Structure​

The model assumes that maintaining a favorable risk-to-reward ratio can support positive expectancy if win rate and execution conditions remain stable.

The framework does not assume a high win rate. Losses are treated as expected outcomes within a bounded risk structure.

note

The model is structured around expected value rather than win rate optimization. Risk is predefined before trade activation.

3.5.3 Position Sizing​

Position size is determined using fixed dollar risk.

Let:

accountRisk = maximum dollar amount the trader is willing to lose if the stop is reached
stopDistance = ATR × stopMultiplier

StopDistance is measured in price units.

Then:

positionSize = accountRisk / stopDistance

This ensures uniform risk exposure across trades regardless of instrument volatility.

note

accountRisk is commonly expressed as a percentage of total trading capital, but the model treats it as a user-defined parameter and does not enforce a specific capital allocation rule.

Position sizing example

ATR = $2
stopMultiplier = 1

stopDistance = 2×1=2 × 1 = 2

accountRisk = $100

positionSize = 100 / 2 = 50 shares

The model does not define portfolio-level capital allocation rules.