Risk Management

Risk Per Trade

The amount of capital risked on a single trade. Industry convention:

• Conservative: 0.5-1% of account balance per trade
• Moderate: 1-2% of account balance per trade
• Aggressive: 2-5% of account balance per trade

risk_amount = account_balance * risk_percentage

Example: £10,000 account, 1% risk = £100 maximum loss per trade.

Risk/Reward Ratio

The ratio of potential loss to potential gain:

risk    = entry_price - stop_level  (for BUY)
reward  = limit_level - entry_price (for BUY)
ratio   = risk : reward

Guidelines:

• Minimum 1:1.5 -- risk £1 to make £1.50
• Ideal 1:2 or better -- risk £1 to make £2+
• Never worse than 1:1 unless win rate is very high

Position Sizing Formula

Calculate position size based on defined risk:

position_size = risk_amount / (stop_distance * value_per_point)

Where:

• risk_amount = how much you're willing to lose (e.g. £100)
• stop_distance = points between entry and stop (e.g. 50 points)
• value_per_point = currency value per point of movement per 1 unit of size

For spread bets, 1 unit = £1/point, so:

size = risk_amount / stop_distance
size = £100 / 50 = £2 per point

For CFDs, value per point depends on contract specification. Check ig_market for details.

Workflows

Position Sizing Calculator

When the user asks "how much should I trade" or "what size position":

1. Get account details: ig_accounts -- note available balance

2. Get instrument details: ig_market(epic) -- note min size, point value

3. Determine risk parameters:

   • Risk percentage (ask user, default to 1%)
   • Stop distance (from technical analysis or user preference)

4. Calculate:

   Account balance:  £10,000
   Risk per trade:   1% = £100
   Stop distance:    50 points
   Value per point:  £1 (spread bet) or as per contract spec (CFD)
   
   Position size = £100 / (50 * £1) = 2.0
   
   Recommended size: £2 per point
   Maximum loss:     £100 (1% of account)
   

5. Verify the calculated size meets the instrument's minimum deal size.

6. Check margin: Ensure the position won't use excessive margin.

Stop-Loss Strategy Selection

Present the user with stop-loss options based on their situation:

Fixed Stop

A stop at a specific price level. The most common type.

Best for: Standard trading, known support/resistance levels.

ig_create_position(
  ...
  stopLevel: 7400.0       // absolute level
  // OR
  stopDistance: 50         // points from entry
)

Placement guidelines:

• Below recent support (for BUY) / above recent resistance (for SELL)
• At least as far as the min stop distance (ig_market -> dealingRules.minStopOrProfitDistance)
• Not so tight that normal price fluctuations trigger it

Guaranteed Stop

IG guarantees execution at exactly the stop level, even through gaps. Extra premium charged.

Best for: High-volatility events (earnings, elections), weekend holding, illiquid markets.

ig_create_position(
  ...
  guaranteedStop: true,
  stopDistance: 50
)

Trade-off: Wider spread (premium). Check costs with ig_costs_open.

Trailing Stop

The stop automatically moves in your favor as the price moves, but doesn't move back against you.

Best for: Trending markets where you want to lock in profits while letting winners run.

ig_update_position(
  dealId: "<id>",
  trailingStop: true,
  trailingStopDistance: 30,     // distance from current price
  trailingStopIncrement: 10    // minimum move before stop adjusts
)

Note: Trailing stops must be enabled in account preferences. Check with ig_preferences.

Break-Even Stop

Moving the stop to entry price after the trade moves in your favor, eliminating risk.

When to apply: After the position has moved 1x the original stop distance in profit.

// Original trade: BUY at 7500, stop at 7450 (50-point stop)
// Price moves to 7550 (50 points profit)
// Move stop to break-even:
ig_update_position(
  dealId: "<id>",
  stopLevel: 7500.0    // entry price = zero risk
)

Risk Assessment for a Proposed Trade

Before any trade, calculate and present the full risk picture:

1. Get instrument details: ig_market(epic)

2. Calculate:

   TRADE RISK ASSESSMENT
   ─────────────────────
   Instrument:      FTSE 100 (IX.D.FTSE.DAILY.IP)
   Direction:       BUY
   Entry (offer):   7521.5
   Size:            £2/point
   
   Stop level:      7470.0 (51.5 points)
   Limit level:     7600.0 (78.5 points)
   
   Maximum loss:    £103.00 (51.5 × £2)
   Target profit:   £157.00 (78.5 × £2)
   Risk/Reward:     1:1.53
   
   Account balance: £10,000
   Risk as % of account: 1.03%
   Margin required: £375.00 (5% of position value)
   Margin utilization after trade: 12.5%
   
   VERDICT: Within acceptable risk parameters ✓
   

3. If risk exceeds thresholds, suggest adjustments:

   • Reduce size to meet 1% risk target
   • Widen the stop (but adjust size down accordingly)
   • Use a guaranteed stop if holding through a risky event

Portfolio Risk Review

Assess risk across all open positions:

1. ig_positions -- all open positions

2. ig_accounts -- account balance and margin

3. Calculate:

   • Total margin used vs. available
   • Total maximum loss (sum of: distance to each stop × size)
   • Positions without stops (flag as unlimited risk)
   • Correlated positions (e.g. long FTSE + long DAX = correlated directional risk)

4. Present:

   PORTFOLIO RISK SUMMARY
   ──────────────────────
   Open positions:          5
   Positions with stops:    3 / 5 ⚠️
   Total margin used:       £2,400 / £10,000 (24%)
   
   Maximum defined loss:    £450 (from stopped positions)
   Undefined risk:          2 positions without stops ⚠️
   
   Correlation risk:        3 long index positions (FTSE, DAX, DOW)
                            These are highly correlated -- a market
                            sell-off would hit all three simultaneously.
   
   RECOMMENDATIONS:
   1. Add stops to the 2 unprotected positions
   2. Consider reducing index exposure (3 correlated longs)
   3. Margin utilization is healthy (24%)
   

Adjusting Risk on Existing Positions

When positions are already open and the user wants to manage risk:

Tighten Stops (Lock in Profits)

ig_update_position(dealId: "<id>", stopLevel: <new_tighter_level>)

Widen Stops (Give More Room)

Only do this if the user has calculated the increased risk and accepts it. Present the new maximum loss.

Add Stops to Unprotected Positions

1. ig_positions -- find positions without stops
2. For each, determine appropriate stop level from price history
3. Present the stop levels and maximum loss
4. After user approval: ig_update_position(dealId, stopLevel)

Scale Out

Reduce risk by closing part of the position:

ig_close_position(dealId: "<id>", direction: "SELL", size: <partial_size>, orderType: "MARKET")

Risk Rules of Thumb

Common Mistakes to Flag

• Moving stops further away to avoid being stopped out -- this increases risk
• No stop-loss on leveraged positions -- risk of losing more than deposited
• Position too large relative to account -- one bad trade can devastate the account
• Correlated positions not counted as combined risk -- 5 long index positions is not diversification
• Ignoring overnight funding costs eating into profits on long-held DFB positions
• Trading during low liquidity (pre-market, overnight) with tight stops -- slippage risk