lucid-fdn/trading

Trading

Calculate optimal position sizes, manage risk with stop losses and take profits, and execute orders across DEX and CEX venues.

Position Sizing (Fixed-Percentage Risk Model)

The core risk model: risk a fixed percentage of portfolio value per trade.

Formulas

Risk Amount = Portfolio Value * (Risk Per Trade % / 100)
Stop Loss Distance = |Entry Price - Stop Loss Price|
Position Size (units) = Risk Amount / Stop Loss Distance
Position Value = Position Size * Entry Price
Max Allowed Value = Portfolio Value * (Max Position % / 100)

If Position Value > Max Allowed Value, cap the position:

Position Value = Max Allowed Value
Position Size = Max Allowed Value / Entry Price

Example

Portfolio: $50,000. Risk per trade: 2%. Entry: $100. Stop loss: $95.

Risk Amount = $50,000 * 0.02 = $1,000
Stop Loss Distance = |$100 - $95| = $5
Position Size = $1,000 / $5 = 200 units
Position Value = 200 * $100 = $20,000
Max Allowed (10%) = $50,000 * 0.10 = $5,000
Since $20,000 > $5,000 → cap at $5,000 → 50 units

Kelly Criterion (Half-Kelly)

Optimal position sizing based on historical win rate and average win/loss.

kelly = (WinRate * AvgWin% - (1 - WinRate) * AvgLoss%) / AvgWin%
half_kelly = max(0, kelly / 2)
Position Value = Portfolio * half_kelly

Default estimates (when no historical data available):

• Win Rate: 55%
• Average Win: 3%
• Average Loss: 2%

Half-Kelly is used instead of full Kelly to reduce the risk of ruin. Full Kelly is mathematically optimal but assumes perfect knowledge of probabilities, which is unrealistic in practice.

Risk/Reward Ratio

Risk = |Entry Price - Stop Loss Price|
Reward = |Take Profit Price - Entry Price|
R:R = Reward / Risk

| R:R Rating | Ratio | Guidance | |-----------|-------|---------| | Excellent | >= 3:1 | High confidence trades | | Good | >= 2:1 | Standard target | | Acceptable | >= 1:1 | Only with high win rate | | Poor | < 1:1 | Avoid unless special circumstances |

Order Types

| Order Type | Description | |-----------|-------------| | market | Execute immediately at current market price | | limit | Execute only at specified price or better | | stop_loss | Sell when price drops to stop level (risk management) | | take_profit | Sell when price rises to target level (lock in gains) | | trailing_stop | Stop loss that moves up with price (follows by fixed % or amount) |

Slippage Management

• Default slippage: 0.5%
• Slippage is the difference between expected and actual execution price
• For DEX swaps, set slippage tolerance per exchange:
  • Jupiter (Solana): specified in basis points (0.5% = 50 bps)
  • 1inch (EVM): specified as percentage (0.5 = 0.5%)
• Higher volatility tokens may need higher slippage tolerance (1-3%)
• Very low liquidity tokens may need 5%+ or should be avoided

Default Parameters

| Parameter | Default | Description | |-----------|---------|-------------| | Default Slippage | 0.5% | Slippage tolerance for swaps | | Max Position Size | 10% | Maximum % of portfolio in a single position | | Risk Per Trade | 2% | Maximum % of portfolio risked per trade | | RSI Oversold | 30 | RSI level considered oversold | | RSI Overbought | 70 | RSI level considered overbought |

See references/risk-parameters.md for the full parameter table with valid ranges.