Risk Management starts with trade implementation. An asymmetrical risk profile is paramount to success. A typical trade setup has three elements: fundamental tailwind, a good trend, and a favorable sentiment.
Risk has two components: likelihood and consequence. To access the risk/reward of a position, whether initiating a new position or maintaining an existing position, it is critical to estimate both factors. For example, a 50/50 event typically needs at least a 1.5 reward/risk to be considered. A variation of Kelly criterion based on the expected value of a trade serves as a position sizing tool.
We utilize a risk ranking matrix to calculate the Favorability Index, on which decisions are guided. This algorithm takes into account macroeconomic conditions, supply/demand/storage, prevailing bias, seasonality, price actions, and weather/political events.
Where appropriate, position and portfolio level risk management is accomplished by a combination of correlation shift monitoring, inter-commodity hedging, loss/profit objective management, and sentiment monitoring in order to mitigate against counter-trend movements and tail risk events.
Careful consideration is given to portfolio construction to avoid risk concentration and to ensure effective hedging in different macro economic environments. Typical range of margin/equity ratio is 5% to 8% including hedges.
Although Kronos endeavors to mitigate risk factors, the inherent risk of loss is always present. Trading with Kronos bears the risk of loss, please refer to the Disclosure Document to understand the risks involved.