UTM: Adaptive Risk Management Formula Language

This is part of the larger UTM Manager Guide - Other - 30 January 2023 - Traders' Blogs (mql5.com)

The Adaptive Risk Management Formula Language in UTM Manager offers traders a versatile platform to define risk adjustments based on account performance metrics and recent trade outcomes.

Overview:

The formula's design ensures ease of understanding for all, from novices to seasoned traders, enabling each to create unique risk management strategies. NOTE: Drawdown-Based formulas are disabled If 'Custom account balance mode' has been activated or Trade Insights does not function.

Formula Structure:

Formulas follow the pattern: condition: risk adjustment. Dive into the components:

Comparison Operators:

• BELOW (less than)
• ABOVE (greater than)

Separators:

• Colon (:): Differentiates the condition from its corresponding risk adjustment.
• Comma (,): Separates elements within a condition, such as percentage and reference balance.
• Semicolon (;): Demarcates individual segments of the formula, facilitating the fusion of combined strategies.

BALANCE BELOW -2, 10000: -50; 
BALANCE ABOVE 2.5, 10000: 30; 
RANGE -2  to 3, 10000: 10 

1. Balance-Based Risk Management:
Fine-tune your risk by contrasting your existing balance with a reference balance.

a. Specific Thresholds:

BALANCE BELOW percentage, ref_balance: risk_adjustment

🔍 Example: To reduce risk by 50% when your balance descends by 2% from a $10,000 benchmark:

BALANCE BELOW -2, 10000: -50

BALANCE ABOVE percentage, ref_balance: risk_adjustment

🔍 Example: To enhance risk by 30% when your balance rises by 2.5% from a starting $10,000:

BALANCE ABOVE 2.5, 10000: 30

b. Balance Ranges:

RANGE min_percentage to max_percentage, ref_balance: risk_adjustment

🔍 Example: For variations between -2% and +2% from a $10,000 reference, preserving the standard risk strategy:

RANGE -2 to 2, 10000: 0 

c. Conditional Boost:

BOOST ABOVE percentage, ref_balance: risk_adjustment

🔍 Example: Elevating risk by 40% when your balance is over 4% from a $6,000 reference and your last trade was a win:

BOOST ABOVE 4, 6000: 40

Understanding the Boost Mechanism:

1. Winning Trade Criterion: A trade is recognized as a "win" if its realized Risk-Reward (RR) ratio meets or exceeds the 'Win Threshold in Realized RR' in 'Trade Insights' setting. For instance, setting a threshold at '1.0' means any trade with a realized RR of 1.0 or above is considered a win.

2. Losing Trade Criterion: Conversely, a trade is recognized as a "loss" if its realized Risk-Reward (RR) ratio falls below the 'Loss Threshold in Realized RR' in 'Trade Insights'  setting. For example, if the threshold is set to '-1.0', any trade with a realized RR below -1.0 is considered a loss.

3. Custom Account Balance Mode: If the Custom account balance mode is activated, the boost condition becomes non-operational because it relies on insights derived from trade outcomes.

4. Persistence and Deactivation of the Boost: Once the boost is activated due to a winning trade, it remains in effect until a trade meets the losing criterion. The boost will be reactivated with any subsequent trades that meet the winning criterion, while our condition is still met.

Combined Risk Strategy Example:
Imagine commencing with a $10,000 balance. Merging specific thresholds, balance ranges, and conditional boosts:

BALANCE BELOW -2, 10000: -50; 
RANGE -2 to 2, 10000: 10; 
BOOST ABOVE 2, 10000: 50

d. Exponential Balance-Based Challenge Passer:

This section focuses on an exponential risk reduction strategy for prop firm challenges, decreasing risk as the balance drops and including a boost for positive trends.

BALANCE BELOW -9, 10000: -90; 
BALANCE BELOW -8, 10000: -60; 
BALANCE BELOW -7, 10000: -40; 
BALANCE BELOW -5, 10000: -20; 
BOOST ABOVE 2, 10000: 20

The approach involves aggressive risk reduction as the balance falls below specified thresholds from a $10,000 benchmark, and a boost when the balance is positively over 2% from the reference.

2. Drawdown-Based Risk Management:
Adapt risk levels by gauging the current drawdown. When Custom account balance mode is activated, drawdown-based formulas are void as they rely on insights.

a. Specific Thresholds:

DRAWDOWN BELOW percentage: risk_adjustment

🔍 Example: Reducing risk by 60% when confronting a -6% drawdown or worse:

DRAWDOWN BELOW -6: -60

DRAWDOWN ABOVE percentage: risk_adjustment

🔍 Example: Increasing risk by 10% when the drawdown is above -4%:

DRAWDOWN ABOVE -4: 10 

b. Stepping Drawdown System:

Create a stepping drawdown system to manage risk in a more nuanced manner. The sequence of conditions matters, and the first condition that satisfies the criteria takes precedence. Example if your normal risk is 1.0%.

🔍 Example: Implementing a stepping drawdown system to reduce risk by 75% at a -5% drawdown, 50% at a -3% drawdown, 25% at a -1% drawdown, and increase risk to +50% when the drawdown is above -1%:

DRAWDOWN BELOW -5: -75; 
DRAWDOWN BELOW -3: -50; 
DRAWDOWN BELOW -1: -25; 
DRAWDOWN ABOVE -1: 50

In this example, if the drawdown is -6%, the first condition is true, and the risk adjustment of -75% would be applied. The sequence ensures that the formula identifies the most specific condition to apply the appropriate risk adjustment.

c. Drawdown-Based Boost System:

You can also create a "boost system" based on the drawdown, specifically designed to increase your risk when conditions are optimal.

🔍 Example: Boosting risk by 50% when there is no drawdown, meaning the last trade was a win:

DRAWDOWN ABOVE 0: 50

In this scenario, the formula checks if the account is not in a drawdown state (drawdown is exactly 0). If both conditions are met, your risk is boosted by 50%. This strategy aims to capitalize on a winning streak by increasing the stake when conditions appear favorable.

3. Exponential Drawdown-Based Risk Management:

In some trading scenarios, you might want your risk adjustment to be more dynamic, particularly when you're experiencing a losing streak. The Adaptive Risk Management Formula Language allows you to create a risk adjustment strategy that becomes exponentially more aggressive as your drawdown increases.

Formula Example:

DRAWDOWN BELOW -9: -90; 
DRAWDOWN BELOW -8: -60; 
DRAWDOWN BELOW -7: -40; 
DRAWDOWN BELOW -5: -20

How It Works:

• Initial Phase (-5% Drawdown): At a drawdown of -5%, your risk is reduced by 20%

  DRAWDOWN BELOW -5: -20

• Moderate Phase (-7% to -8% Drawdown): As the drawdown increases to -7% and -8%, the risk reduction becomes 40% and 60% respectively 

  DRAWDOWN BELOW -7: -40; 
  DRAWDOWN BELOW -8: -60

• Aggressive Phase (-9% Drawdown): At a drawdown of -9%, the risk reduction jumps to 90% 

  DRAWDOWN BELOW -9: -90

This formula ensures that as you approach a -10% drawdown, your risk is reduced in an exponential manner, allowing you to preserve your capital more effectively.

Priority and Sequence:

Remember, the sequence in which the conditions are listed is crucial. The formula uses a "first-come-first-serve" principle. In this example, if your drawdown is -9%, the condition DRAWDOWN BELOW -9: -90 will be true, and a risk adjustment of -90% will be applied, overriding any other conditions that might also be true.

By incorporating this exponential drawdown-based risk management strategy, you can adapt to losing streaks more effectively, reducing your risk in a manner that is proportional to the severity of your drawdown.