Agent skill

risk-sizing-not-blocking

Risk managers should SIZE trades, not BLOCK them. Trigger when: (1) capital manager blocks trades, (2) risk manager rejects orders, (3) trades fail due to 'exceeds limit', (4) components don't work in harmony.

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npx add-skill https://github.com/majiayu000/claude-skill-registry/tree/main/skills/data/risk-sizing-not-blocking

SKILL.md

Risk Sizing Not Blocking

Experiment Overview

Item Details
Date 2024-12-24
Goal Refactor risk/capital managers from blocking trades to sizing them correctly
Environment scripts/live_trader.py, alpaca_trading/risk/
Status Success

Context

The trading system had multiple components that could BLOCK trades:

  1. Capital Manager: check_trade_allowed() returned False if trade exceeded limits
  2. Portfolio Risk Manager: check_position_limits() returned False for VaR/concentration violations

This caused problems:

  • Trades were rejected after signal generation
  • Components didn't work in harmony
  • Orders sized upstream were blocked downstream

Architectural Principle: All trading system components should work in harmony. There should never be an order that is sized too large for capital management.

Verified Workflow

The Wrong Pattern (Blocking)

python
# WRONG: Check if arbitrary size is allowed, block if not
estimated_qty = cash_available * alloc / price
allowed, reason = capital_mgr.check_trade_allowed(allocation, estimated_qty * price, symbol)
if not allowed:
    logger.warning(f"{symbol}: Capital Manager BLOCKED trade: {reason}")
    return state, {"skip_reason": "capital_limit"}  # Trade rejected!

The Correct Pattern (Sizing)

python
# CORRECT: Get max allowed size, use it as constraint
max_qty_from_capital = capital_mgr.get_max_trade_size(
    allocation=capital_allocation,
    symbol=symbol,
    current_price=price,
    positions=positions_dict
)

# Later, during GARCH sizing:
qty = garch_mgr.calculate_position_size(...)
qty = min(qty, max_qty_from_capital)  # Apply constraint
# Order executes with correct size - no blocking needed

Complete Sizing Flow

python
# 1. Capital Manager provides max qty from allocation
if capital_allocation is not None and capital_mgr is not None:
    max_qty_from_capital = capital_mgr.get_max_trade_size(
        allocation=capital_allocation,
        symbol=symbol,
        current_price=price,
        positions=positions_dict
    )
    if max_qty_from_capital <= 0:
        return state, {"skip_reason": "no_capacity"}  # Only skip if truly zero
else:
    max_qty_from_capital = float('inf')

# 2. Risk Manager provides max qty from position limits
if portfolio_risk_mgr is not None:
    max_value_from_risk = portfolio_metrics.total_value * 0.20  # 20% max
    max_qty_from_risk = max_value_from_risk / price
    max_qty_from_capital = min(max_qty_from_capital, max_qty_from_risk)

# 3. GARCH calculates initial size
qty = garch_mgr.calculate_position_size(symbol, account_value, signal_strength, price, returns)

# 4. Apply all constraints
qty = min(qty, max_qty_from_alloc)      # Allocation limit
qty = min(qty, max_qty_from_capital)     # Capital + risk limits
qty = qty * position_scale               # Drawdown scaling

# 5. Execute with correct size
executor.submit(symbol, qty=qty, side=entry_side, type="limit")

Failed Attempts (Critical)

Attempt Why it Failed Lesson Learned
check_trade_allowed() blocking Rejected trades after signal generation Use get_max_trade_size() for constraints
check_position_limits() blocking Portfolio risk rejected sized trades Apply limits as max position value constraint
Estimate size then check Estimated size != final size, caused false blocks Get max size first, use as constraint
Hard-coded $1000 min_cash_buffer Blocked trades on small accounts Use percentage-based limits only

Key Insights

Harmony Principle

All trading system components should work together:

Signal Generation → Sizing → Risk Constraints → Execution
      ↓               ↓            ↓              ↓
   Direction      Initial qty   Apply limits   Correct size

NOT:

Signal Generation → Sizing → Risk Check → BLOCKED!

When to Skip vs When to Size

Situation Action
No capacity at all (max_qty = 0) Skip with "no_capacity"
Low confidence signal Reject signal (not a blocking issue)
Size exceeds limit Reduce size to limit (don't block)
Risk limit exceeded Reduce size to risk limit (don't block)

Methods That Size vs Methods That Block

Method Purpose Use For
get_max_trade_size() Returns max qty Sizing constraints
calculate_allocation() Returns capacity info Sizing constraints
check_trade_allowed() Returns bool AVOID - causes blocking
check_position_limits() Returns bool AVOID - causes blocking

Files Modified

scripts/live_trader.py:
  - Lines 1375-1391: Capital manager sizing (removed check_trade_allowed)
  - Lines 1393-1411: Risk manager sizing (removed check_position_limits)
  - Lines 1466-1467: Apply max_qty_from_capital constraint

References

  • alpaca_trading/risk/capital_manager.py: get_max_trade_size() at lines 284-350
  • alpaca_trading/risk/portfolio_risk.py: RiskLimits at lines 20-35
  • scripts/live_trader.py: Sizing flow at lines 1375-1505

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