polymarket-skills/polymarket-paper-trader/references/risk-rules.md

Risk Rules Reference

Default Risk Parameters

These rules are enforced automatically on every trade. They can be overridden per-portfolio at initialization or bypassed with --force (not recommended).

Position Sizing

Parameter	Default	Key
Max single trade	10% of portfolio value	max_position_pct
Max single market exposure	20% of portfolio value	max_single_market_pct
Human approval required	Trades > 15% of portfolio	human_approval_pct

Rationale: Prediction markets have binary outcomes. A 10% max position ensures no single wrong bet destroys the portfolio. The 20% market cap prevents over-concentration in correlated outcomes (e.g., multiple markets about the same event).

Drawdown Controls

Parameter	Default	Key
Max total drawdown	30% from peak	max_drawdown_pct
Daily loss limit	5% of starting balance	daily_loss_limit_pct

Behavior when triggered:

• Max drawdown: ALL trading halted. No new positions allowed. Existing positions remain open.
• Daily loss limit: No new trades for the rest of the day (UTC). Resets at midnight UTC.

Position Limits

Parameter	Default	Key
Max concurrent positions	5	max_concurrent_positions

Adding to an existing position does not count as a new position.

Custom Risk Configuration

Pass a custom config when initializing a portfolio:

from paper_engine import init_portfolio

init_portfolio(
    starting_balance=5000,
    risk_config={
        "max_position_pct": 0.05,          # More conservative: 5%
        "max_drawdown_pct": 0.20,          # Tighter drawdown: 20%
        "max_concurrent_positions": 10,     # More diversified
        "daily_loss_limit_pct": 0.03,      # Tighter daily limit: 3%
        "max_single_market_pct": 0.15,     # 15% per market
        "human_approval_pct": 0.10,        # Approve trades > 10%
    }
)

Kelly Criterion Sizing

The execute_paper.py executor uses a half-Kelly sizing formula when no explicit size is given:

kelly_fraction = max(0, (2 * confidence - 1)) * 0.5
size = portfolio_value * min(kelly_fraction, 0.10)

This means:

• 50% confidence = 0% of portfolio (break-even, no bet)
• 60% confidence = 5% of portfolio
• 70% confidence = 10% of portfolio (capped at max_position_pct)
• 80%+ confidence = 10% of portfolio (hard cap)

Half-Kelly is used instead of full Kelly because:

1. Confidence estimates are noisy (model uncertainty)
2. Prediction market odds already embed crowd wisdom
3. Half-Kelly has 75% of the growth rate with far lower variance

Risk Check Order

1. Balance check (always enforced, even with --force)
2. Position size vs portfolio
3. Drawdown check
4. Concurrent position limit
5. Single market concentration
6. Human approval threshold
7. Daily loss limit

Emergency Override

The --force flag bypasses rules 2-6. Balance check (rule 1) cannot be bypassed. Daily loss limit is also checked but can be overridden.

Use --force only for:

• Testing and development
• Closing positions in distress
• When a human has explicitly approved the trade