Metrics

Risk Distribution Analysis: Balancing Your Trading Portfolio

Marcus Chen·Head of Analytics

October 30, 20247 min read

Diversification isn't just for long-term investors. As an active trader, understanding how your risk is distributed helps prevent concentration risks and optimize capital allocation.

Why Risk Distribution Matters

Consider a trader who:

Risks $500 per trade

Takes 20 trades per week

But 80% of trades are in tech stocks

When tech sells off, this trader faces correlated losses across multiple positions. Proper risk distribution would limit this exposure.

Key Risk Distribution Metrics

By Instrument/Sector

What percentage of risk goes to each stock/sector?

Are you overweight in one area?

How correlated are your positions?

By Strategy

How much risk is allocated to each strategy?

Which strategy has the best risk-adjusted returns?

Should you shift allocation?

By Time

How is your risk distributed across the day/week?

Are you front-loading or back-loading your trading?

Does your risk align with your best performance periods?

By Setup Type

Breakouts vs. reversals vs. momentum

How much risk goes to each setup type?

Which setups deserve more capital?

Optimization Strategies

1. Sector Limits

Define maximum exposure per sector. Example: No more than 25% of daily risk in any single sector.

2. Correlation Monitoring

Before adding a position, check correlation with existing positions. Avoid stacking correlated bets.

3. Strategy Allocation

Allocate risk based on historical performance:

Top strategy: 40% of risk

Second strategy: 35% of risk

Third strategy: 25% of risk

4. Time-Based Limits

If your morning performance is better, allocate more risk to morning trades. Reduce afternoon risk.

Using Practice—Process

The Risk Distribution dashboard provides visual breakdowns of your risk allocation. Set up alerts when you exceed concentration limits. Review monthly to optimize your allocation based on performance data.

Marcus Chen

Head of Analytics