Any theory is needed not only in order to be able to use it in practice but also in order to be able to make forecasts with its help. The risk management system implies the development of a series of risk management models that would make it possible to make current changes to the table within a few minutes in accordance with the market situation and see how the future result changes.
Controlling the Deposit Level allows you to predict at which quotes a pair can have a stop out at a given lot volume at Forex. Having averaged data on volatility, you can build an individual strategy of increasing (decreasing) positions in accordance with the rate of a price change and in accordance with the level of leverage. The simplest version of such a scheme can be created in Excel.
“Cost at the current rate” (D3) = C3 * B3. “Floating loss before the first transaction” – 0, “Collateral” (F3) = D3 / 100 (“100” in this case, the leverage size). “Account Level” (H3) = G3 / F3. The cell format is converted into percent and we get the account Level 133%. The stop is still far away.
- A comment. The conditional example! According to traders, it is not advisable to allow a decrease in the Account Level below 700-500%. In this example, the main condition of risk management is violated – 75% of the deposit is involved.
After the transaction was opened, the price suddenly turned around, falling by 25 points (1 point – 0.0001 of the base currency). Fill the second line. B4 = 1.2475. Cells C and D are stretched down. Floating loss: E4 = D4-D3 + E3. Cell F is also stretched down, into cell G4 we insert the formula: = $ G $ 3 + E4. “Account Level” stretch down. As a result of quotes reduction by 25 points, the account level fell by 20%. Fill the table further and expand the formulas.
Gradually decreasing quotes reset the deposit, but the position has not yet been fixed, therefore it is too early to talk about the loss. The margin gradually decreases along with the value of the position, but this has almost no effect on the Account Level. After the 7th line, the Account Level reached a critical figure of 13.5%. As you can see from the table, with a 10% stop out, forced closing of transactions will start at a price between 1.2350 and 1.2345.
How to use this table. Suppose that a trader sees a strong resistance level at 1.2284, where there is a high probability of a reversal, and wants the stop out not to come. Add the 9th line indicating the required level and experiment.
Possible options for action:
- Top up your deposit with $ 370. Just at this mark of quotes, the Account Level will be 10.04%. The second option: replenish the deposit so that the available funds exceed the difference “Means-Pledge” (there are no available funds on the 7th line before the stop out) and open a position in the opposite direction (locking), creating a separate table for it.
- Close 5/6 positions, leaving 1 mini lot in the market. The loss will be $ 750 (900/6 * 5, 7th line on the previous screen, corresponding to the Account Level 13.5%). In the table, we fix the loss, from the deposit there are only 250 US dollars and the current loss for the remaining position is 150 US dollars. We correct all current formulas, now linking to the 8th line with a new deposit amount and position volume, we stretch the cells.
It is possible that two mini lots could be left in the market, I didn’t do such a calculation, but this table is intended for such selection of numbers. It is also convenient to calculate the stop length from such a table, adjusting to the rate of deposit reduction. A similar template can be developed individually.