On Coinmatics, the strategy risk is calculated using the Value at Risk (VaR) model. (Wikipedia link).
This approach allows estimating with a given probability the expected minimum loss volume of a strategy for a certain trading period with a given probability level. In other words, VaR allows estimating the strategy loss level, which hypothetically should not be exceeded.
The higher the expected minimum loss of the strategy, the higher its risk level. It is only possible to calculate the minimum loss value with the VAR approach and it does not imply calculation of the maximum value.
The main advantage of VaR is the ability to compare different assets (coins) in a strategy portfolio and the risks of trading them in order to calculate the possible minimum level of risk. Calculation of trading risks of each asset and their further summation cannot be applied due to possible inaccuracy due to coins diversification.
To calculate the Value at Risk, the strategy trades for a specified period are taken into account. On Coinmatics, the strategy risk is calculated based on the last 30 days of trading. It is measured from 0 to 10, where 0 is the lowest risk level strategy (such a strategy can be called conservative), 10 is the highest, such is a super aggressive one. Sandbox strategies have a default risk score of 5 out of 10.
The risk level is calculated using this formula:
The quantile (30) represents the maximum variation of the strategy's balance over 30 days of strategy trading, in other words, the expected strategy minimum amount of loss.
In this case, the term "expected" is used as a mathematical term; and does not imply a relation to the profit or loss of the strategy.
The quantile (30) is calculated as follows:
Quantile — the value that a strategy's daily profit does not exceed with the percentage probability set by the platform (5% when calculating the risk level on the platform).
For example, the minimum daily profit of the strategy is -2%. Then there is a 95% probability that the strategy profit will be equal to or greater than this value, and there is a 5% probability that the profit will be less than -2%.
The level of risk in turn affects the calculating of the strategy rating;
If you have a Premium Ref Plan or a Premium Plan, you will also have available a risk chart level for every Coinmatics strategy.