Overview: Your SPA3 risk profile determines how much exposure you take during different market conditions and ultimately, how well you manage drawdowns and capitalize on market recoveries. SPA3 provides five distinct profiles, ranging from ultra-conservative (Profile 1) to fully aggressive (Profile 5). Each suits different risk tolerances, capital bases, and emotional comfort levels
When markets get shaky, your success as a trader often comes down to one critical factor: your trading risk profile. In our previous blog about market volatility, we discussed and raised questions about how different SPA3 risk profiles impact portfolio performance, especially during bearish market conditions.
Whether you’re just getting started or have been actively trading for years, finding the right fit for your mechanical risk management style is essential. In this article, we’ll break down the five distinct SPA3 risk profiles and help you understand how each influences your exposure, returns, and peace of mind.
Understanding SPA3 Risk Profiles
SPA3 is a mechanical trading system that uses signals to identify periods of high and low market risk. These signals are visually represented on a chart, with green symbols indicating low market risk and red symbols indicating high market risk. These signals are dynamic; they change as the market shifts direction, and help investors decide how much capital to keep in the market.
Once a risk signal is triggered, traders rely on their predefined trading risk profile to guide their actions. These profiles are written into their Trading Plan, overriding the emotional decision-making that often leads to trouble.
This is where the true power of mechanical risk management lies. It brings consistency into your trading.
Why Your Risk Profile Matters
Your chosen SPA3 risk profile directly impacts how your portfolio performs, especially during turbulent market conditions. For example, someone near retirement may need capital preservation more than aggressive gains. On the other hand, a younger investor might accept more volatility in exchange for higher long-term returns.
Risk profiles are not one-size-fits-all. They depend on:
- Your financial goals
- Capital base (e.g., $80,000 vs. $800,000)
- Risk tolerance
- Market experience
- Psychological comfort with drawdowns
The more aligned your trading risk profile is with your personal circumstances, the more likely you are to stay consistent over time. But most people don’t know this, which is why most traders fail when faced with these risks.
Breakdown of the Five SPA3 Different Risk Profiles
Let’s explore the five SPA3 risk profiles, from most conservative to most aggressive.
Risk Profile 1 – Capital Preservation First
(Lowest risk strategy, best for highly risk-averse investors)
- When a HIGH risk signal appears: Sell all holdings immediately
- Portfolio becomes: 100% cash
- When a LOW risk signal appears: Reenter the market with SPA3 buy signals
This is the most conservative SPA3 risk profile, ideal for investors who prioritize avoiding drawdowns. It performs extremely well during prolonged bear markets, as investors are fully in cash on the worst periods.
However, in fast-recovering bull markets, this profile tends to lag. By the time the green signal appears, many stocks may have already bounced back, leaving the investor on the sidelines.
Risk Profile 2 – Balanced Exposure (Used by the SPA3 Public Portfolio)
- When a HIGH risk signal appears: Hold current positions, but don’t add new ones at full size
- New entries: Reduced by 33%, or up to 50% if the stock belongs to a high-risk sector
- Portfolio exposure: Gradually reduces, often to 50% invested, 50% cash
This trading risk profile gives you a flexible, rules-based approach to derisking. Instead of an immediate shift to cash, your exposure gradually shrinks based on signals and position sizing rules.
In a rising market, Risk Profile 2 may outperform Profile 1 by staying invested during brief pullbacks. In downtrends, it limits damage by shrinking position sizes.
This approach reflects mechanical risk management in action: objective, strategic, and scalable.
Risk Profiles 3 and 4 – Fully Invested with Slight Adjustments
Strategy: Stay 100% invested at all times
In a high-risk market: Slight reduction of open positions
New buys: Still entered at full size
These profiles assume the investor has a long-term bullish view and can tolerate short-term volatility. While they reduce exposure slightly during high-risk periods, they remain aggressively invested and aim to catch most of the market’s upside. These profiles suit traders with higher capital bases and high emotional control.
Risk Profile 5 – All-In, All the Time
(Highest risk strategy)
- No regard for market or sector risk
- Fully invested regardless of conditions
- All buy signals taken at full position size
This is the most aggressive SPA3 risk profile. It’s not for the faint of heart. While it can generate impressive gains during bull runs, it can also suffer large drawdowns in prolonged downturns. Traders using Profile 5 must have both the financial and psychological buffer to ride out market storms without flinching. Here’s how to handle drawdowns without losing confidence.
Real-World Results: The Trade-Offs
During the recent extended downtrend, Risk Profile 1 investors fared significantly better than the others. They stayed out of the market almost entirely, avoiding losses and preserving capital. Meanwhile, higher-risk profiles experienced varying degrees of drawdown depending on their exposure levels.
But in a fast-rising market, the tables turn.
- Risk Profile 1 often underperforms, waiting too long in cash
- Risk Profiles 2 to 5 capture early gains, especially in V-shaped recoveries
The key takeaway? There’s always a trade-off. No profile is “better” in all situations. What matters is choosing one that matches your personality, risk appetite, and goals.
Long-Term Perspective: Equity Beats Cash
If you compare long-term performance, even conservative SPA3 portfolios with mechanical risk management typically outperform cash holdings. A log chart comparing a Risk Profile 2 SPA3 portfolio with the All Ordinaries Index and cash (from January 2001 over 7.8 years) shows:
- SPA3 Portfolio: Outperforms both the index and cash
- Portfolio exposure: Adjusts dynamically with market risk
- Drawdowns: are reduced, but growth is preserved
This proves that a well-structured trading plan, paired with the right SPA3 risk profile, can strike a balance between protection and performance.
Choosing Your Risk Profile: The Final Step
Here’s the most important step: document your chosen SPA3 risk profile in your Trading Plan. Commit to it. Understand the implications. And avoid switching mid-stream just because the market’s acting up.
If your current profile feels too risky during a downturn, adjust it accordingly, but do so with clarity and purpose, not panic. Mechanical systems work only when applied consistently.
Conclusion: Know Yourself, Then Choose Wisely
The beauty of the SPA3 system is that it accommodates different personalities and risk appetites. Whether you’re ultra-conservative or aggressively growth-oriented, there’s a SPA3 risk profile that fits your style.
So ask yourself:
- Can I handle being out of the market and missing gains (Profile 1)?
- Am I comfortable gradually reducing risk and probing the market (Profile 2)?
- Or do I prefer staying fully invested no matter what (Profiles 3, 4, or 5)?
Make your decision, write it into your plan, and stick to it. Mechanical risk management is about preparing. And the more prepared you are, the more consistent your results will be.
What are you waiting for? Learn to trade properly today!
Frequently Asked Questions
1. What is a SPA3 risk profile?
A SPA3 risk profile defines how much market exposure your portfolio maintains during high- and low-risk periods, based on SPA3 system signals. It’s a rules-based framework that supports consistent decision-making.
2. Which risk profile is best for beginners?
Profile 1 or 2 is ideal for newer traders or those with smaller capital bases. These profiles prioritize capital preservation and gradual exposure adjustments, helping traders learn discipline without excessive volatility.
3. Can I switch between risk profiles as market conditions change?
Not mid-trade. Your chosen profile should be written into your Trading Plan and followed consistently. If you outgrow a profile or find it too aggressive/conservative, update your plan during a calm period, not in reaction to market stress.
4. What happens if I stay all-in during high-risk signals (Profile 5)?
You may capture big gains in strong bull markets, but you also risk steep drawdowns during downturns. Profile 5 is best suited for highly experienced traders with strong emotional resilience and larger capital buffers.
5. How do SPA3 profiles help with trading psychology?
They override emotions from decision-making by giving you clear, predefined actions. This supports consistent execution: one of the key paradoxes that separates successful traders from struggling ones.