For every strategy listed at EarnPark users can find the risk level in the strategy description.
This article will thoroughly examine what the risk level entails, how it is calculated, and which factors influence this crucial parameter.
As clients of EarnPark, you deserve complete transparency regarding financial decisions, and this document is designed to provide you with the necessary insights.
Risk level parameters:
Market Volatility
Low Risk: Strategies based on stable market conditions (Delta neutral throughout)
Medium Risk: Strategies based on average market volatility, such as a DeFi strategy (Delta-neutral in price level)
High Risk: Strategies that deviate greatly from market volatility, such as algorithmic trading (all non-delta neutral strategies)
Historical Performance
Low Risk: Strategies with long-term positive and stable performance.
Medium Risk: Strategies with variable performance depending on market conditions.
High Risk: Strategies with variable performance and shorter-term trends.
Liquidity Profile (Coins+Platform)
Low Risk: Strategies based on liquid assets with low bid-ask spreads.
Medium Risk: Strategies that work with assets that have an average level of liquidity.
High Risk: Strategies that require working with less liquid assets.
Automation Level
Low Risk: Strategies that are fully automated and tested on long-term data.
Medium Risk: Strategies that are partially automated and require monitoring.
High Risk: Strategies that require frequent intervention and response to rapidly changing market conditions.
Calculation formula:
Where:
R - Risk score
w1,w2,w3,w4- weights for each parameter
P1, P2, P3, P4 - parameter value (low, medium, high).
Parameters weights:
Market volatility - 60%
Historical performance - 20%
Liquidity profile - 15%
Automation level - 5%
Risk score to Risk level
Risk score range | Risk Level |
1-1.5 | Low |
1.5-2.2 | Medium |
2.2-3 | High |
Example
Let's calculate the risk level for the Algo Trend strategy
Step 1. Define parameter value
Market volatility = High risk. As the strategy deviates greatly from market volatility
Historical Performance = Medium risk. The strategy has variable performance depending on market conditions performance.
Liquidity profile = Low Risk. Strategy is based on liquid assets with low bid-ask spreads and works on high liquidity platforms.
Automation Level = Low Risk. Strategy is fully automated and tested on long-term data.
Step 2. Calculate risk score with parameters weights:
3*60%+2*20%+1*15%+1*5% = 2.4
Step 3. Convert Risk score to Risk Level in the table above.
2.4 = High Risk Level