How to select limit and stop loss levels for the strategy? What are acceptable risk limits?
Answer - Stop loss and take profit parameters can be adjusted after backtesting, however, it will also depend on your risk appetite. One way can be to first decide on the cash you want to invest in your strategy and set take profit and stop loss as fixed numbers. Say you want to invest $1000 in a strategy and set your stop loss at $150, i.e. you close out of positions if your open trades show a P&L of -$150. Similarly, you can set take profit at $100, i.e. you close out of positions if your open trades show a P&L of +$100. Then, you can also set a maximum drawdown condition which will check for your overall portfolio value, say you close out of positions if the value of your portfolio goes below $850. In this scenario we set absolute parameters for stop loss and take profit, we can also keep them dynamic by choosing to close out positions based on z-score and moving averages.