Automated Capital Allocation Systems: A Practical Guide for MT5 Traders

What Is a Capital Allocation System?

A capital allocation system is an algorithmic framework that decides how much of your trading account to risk on any given opportunity. Unlike a simple entry/exit signal generator, a capital allocation system integrates position sizing, portfolio-level risk management, and multi-strategy consensus into a unified decision engine.

The Core Problem: Human Capital Allocation Is Broken

Research consistently shows that discretionary traders allocate too much to high-conviction trades, too little to unfamiliar setups, and vary position size based on recent outcomes. These biases systematically erode edge even when the underlying signal is sound.

Automated capital allocation removes the human from the sizing decision entirely. The system calculates position size from first principles every time, without emotion.

Kelly Criterion: The Mathematical Foundation

The Kelly Criterion provides the mathematically optimal bet size for maximizing long-run geometric growth. For trading: f* = (p x b - q) / b, where f* is the fraction of capital to risk, p is win probability, q is loss probability, and b is the win/loss ratio. Most systematic traders apply fractional Kelly (50%) to reduce equity curve volatility.

Multi-Strategy Consensus: Reducing False Signals

Single-strategy systems are vulnerable to regime changes. SOVEREIGN requires agreement from at least 3 of 5 independent models before allocating capital, filtering approximately 40% of lower-conviction signals.

Drawdown Management: The 10% Hard Cap

A hard drawdown cap at 10% from peak equity prevents catastrophic losses during model failure, forces a review period after unusual market behavior, and protects the trader from panic-driven manual intervention. From 10% drawdown, an 11.1% gain restores peak equity. From 50% drawdown, a 100% gain is required.