Calculating realistic risk of losing more than initial deposit

[discodave82]

Hi,

I am trying to determine my risk of losing more than my initial deposit. I am betting the FTSE100 at £3 a point with a balance of £500 (started with £100 @ £2 per point and have been testing a system for 1.5 months) in my account this means if the FTSE is at 6700 I have leverage value of £20100. (I am only risking a small % of my capital just most of it doesn't sit in my SB account)

I am wondering what the real risk of the FTSE having a market gap big enough to wipe out my balance and mean I owe more! So If the FTSE fell ~166 points my balance would be wiped out and if there was a gap of over 166 points I would owe money.

I would like to step up to £20 per point so my leverage value would be (20 * 6700) £134000 so if the FTSE crashed to 0 and I was long I am exposed to £134000. Now if the FTSE fell to 0 I am sure I would have more problems than owing £134000

What are the realistic risks of losing serious cash over and above my deposit when betting £20 per point on the FTSE.

Hope this makes some sense!

Dave

 

[hacks]

The risk of losing more than your initial deposit would depend on your percentage of winning trades, size of average win, size of average loss, etc. There is a formula for "Risk of Ruin" as it is called.

As for the risk of the FTSE dropping x number of points, that would depend on the volatility of the FTSE. In the book "Options Volatility and Pricing" by Sheldon Natenberg, he would work out the daily volatility, for example, as the annual volatility divided by the square root of the number of trading days in a year, e.g.:

Annual Volatility 12%
Trading days in a year: 256
Daily volatility = 12% / 16 = 0.75%

You could use a similar formula for working out monthly and weekly volatility, etc.

You then use standard deviations:

Plus or minus 1 standard deviation = 68.3% chance
Plus or minus 2 standard deviations = 95.4% chance
Plus or minus 3 standard deviations = 99.7% chance

For example, using the daily volatility we calculated above, a price change (up and down) of 0.75% or less would occur 68.3% of the time (or 15.85% of the time that the FTSE drops more than 0.75%).

You can download volatility data for the FTSE (free) from liffe.com/reports/eod/settlement

 

[peakoil]

Hi discodave82, what follows is largely my opinion and please take it or leave it as you wish. Most importantly it's important to DYOR. With that being said, further to what's been said already, the following raised my eyebrows: " I am betting the FTSE100 at £3 a point with a balance of £500 (started with £100 @ £2 per point and have been testing a system for 1.5 months)"

Sorry to question it, but are you are not extremely over-leveraged, or potentially overexposed even betting £3 pp on FTSE with 500 pounds in your account? As for your desire "to step up to £20pp", any black swan event could wipe out your account, if you find yourself positioned the wrong way and continuing to use that kind of leverage, with anywhere near the amounts you're thinking of.

When I was starting to spead-bet I soon learned that giving myself a comfortable margin of safety became what I'd soon come to best describe as 'an expensive lesson'. Again please DYOR, but just remember that some argue that people should sensibly be betting no more than £1 per point per 1K in their account. And I'd have difficulty arguing otherwise.
While market volatility may be continuing at a low now, giving you (& the rest of us) a sense of calm & order, there is nothing surer than that it will return; and when it does, there is no advance warning given for everyone to cover his positions. What's more, should that happen, you could find yourself needing to re-evaluate that system you've been deploying successfully for the past one and a half months.

 

[random12345]

Hi,

I am trying to determine my risk of losing more than my initial deposit. I am betting the FTSE100 at £3 a point with a balance of £500 (started with £100 @ £2 per point and have been testing a system for 1.5 months) in my account this means if the FTSE is at 6700 I have leverage value of £20100. (I am only risking a small % of my capital just most of it doesn't sit in my SB account)

I am wondering what the real risk of the FTSE having a market gap big enough to wipe out my balance and mean I owe more! So If the FTSE fell ~166 points my balance would be wiped out and if there was a gap of over 166 points I would owe money.

I would like to step up to £20 per point so my leverage value would be (20 * 6700) £134000 so if the FTSE crashed to 0 and I was long I am exposed to £134000. Now if the FTSE fell to 0 I am sure I would have more problems than owing £134000

What are the realistic risks of losing serious cash over and above my deposit when betting £20 per point on the FTSE.

Hope this makes some sense!

Dave

You can play around with scenarios here : http://equitycurvesimulator.com/

The problem being your win probability is based on a very small sample. Most interpretations of risk/return ratios are also extremely flawed so, basically put, you'll need a lot more experience in general.

 

[NVP]

Hi,

I am trying to determine my risk of losing more than my initial deposit. Hope this makes some sense!

Dave

Hi Dave

you can play with probabililities all day and all night.....but this is the real world of Trading so you should anticipate losing all your first few "pots" until experience and research finds you a half decent system and trading style to play with ........dont worry about it .........

write it off and now go trade it ..........scared money is lost money .....the first few years is just about finding that personal Grail / approach for the future

N

 

[Hoggums]

Use a guaranteed stop if you are that concerned. Then, if someone manages to detonate a nuke in London over the weekend and the FTSE gaps 1000+ points on Monday, you will only get stopped out at your stoploss. No lower.

 

[discodave82]

Hi All,

Thanks for the responses. Again if god forbid something really bad happened I am sure I would have bigger worries than losing a few quid!

I am just trying to get risk management down as this seems like the most important thing!

I have actually just withdrawn the £600 made so far to buy my wife a watch

I will start again with £100 again next month and although I have plenty of capital which I can move from other assets and put into spread betting I will probably start again at £1 a point as like someone stated I need much more practice with my system! I am over exposed in a sense that my account balance could be wiped out but I am not if I take into account assets which could be easily liquidated (and In fact this is the real basis for my question how much could I actually lose in one hit). I do think I have just been lucky in a short period of time!

Once I am confident I will step it up and for now my wife will be very happy :cheesy:

Dave

 

[discodave82]

p.s. guaranteed stops aren't really an option for the amount of time my trades are open they are just too expensive! I am not scalping but tend to only be in the market for a few hours tops!

 

[mike.]

Hi Dave, firstly imo, £3 p/p on a £500 account is pushing it a bit, not much room for losses, drop it to a £1p/p and set a personal level where you will increase your stake, say, once your acc reaches £1000 then raise your stake to £2 p/p. if your drawdown takes you below £1000 then decrease your stake back to £1.

Below is a statement i took from my broker, it may be what your looking for.

Quote : "At InterTrader we want to help minimise the risks of trading. We have therefore designed an account where all your positions will have an associated Guaranteed Stop Order attached to them. This means that, should the market move against you, we will guarantee to close all your positions at a pre-specified exact point. In other words, for every trade you open with a Limited Risk Account you must specify a guaranteed stop to cover the maximum possible loss on that trade. This way you cannot lose more than you have initially invested.

Depending on your level of experience and financial situation you may be steered towards this account when you apply. Once you have gained some experience you are welcome to contact Customer Support to request to swap your account to a standard account. This means you will have the option of placing Guaranteed Stop Orders if you wish but these will not be mandatory.

As mandatory Guaranteed Stop Orders are essentially a form of insurance against market gaps, they come at a small cost. This will be a premium that will be debited from your account when you place a trade. You should also note that by opting for a Limited Risk Account your Stop will need to be placed further away from your entry level than if you selected a standard account where Guaranteed Stop Orders are not mandatory. Please also be aware that you will not be able to amend orders or place any new orders with guaranteed stops outside of our market hours. "

Hope this help's

 

[discodave82]

Cheers Mike the cost of guaranteed stop losses in conjunction with the system I am using would make it non profitable so I can't really go down that route.

I accept all the advice on £3 per point being too high if my total bank was £500 but the reality of the situation is that my bank is much bigger this is just what was in my trading account. The other capital is just in standard shares which I can liquidate if I feel confident enough.

For now I have enjoyed my more than likely lucky streak and will keep studying my system and develop a risk management strategy before I go any further.

Thanks all for the advice and info.

 

[Jason Rogers]

I am wondering what the real risk of the FTSE having a market gap big enough to wipe out my balance and mean I owe more! So If the FTSE fell ~166 points my balance would be wiped out and if there was a gap of over 166 points I would owe money.

Hi Dave,

Welcome to the forum

First, I want to echo the comments made here by others about the importance of not overleveraging your account. That said, since your question was about the risk of you losing more than your initial deposit, I thought you might be interested in knowing about our No Debit Balance Policy. Simply put, it means that when trading with FXCM, you're only ever risking the money that's in your trading account. If you were trading the UK100 CFD and the FTSE gapped enough to put your account in a negative balance, FXCM would credit your account back to zero for that trading loss.

Jason

 

[CityMasterTrader]

Hi,

I am trying to determine my risk of losing more than my initial deposit. I am betting the FTSE100 at £3 a point with a balance of £500 (started with £100 @ £2 per point and have been testing a system for 1.5 months) in my account this means if the FTSE is at 6700 I have leverage value of £20100. (I am only risking a small % of my capital just most of it doesn't sit in my SB account)

I am wondering what the real risk of the FTSE having a market gap big enough to wipe out my balance and mean I owe more! So If the FTSE fell ~166 points my balance would be wiped out and if there was a gap of over 166 points I would owe money.

I would like to step up to £20 per point so my leverage value would be (20 * 6700) £134000 so if the FTSE crashed to 0 and I was long I am exposed to £134000. Now if the FTSE fell to 0 I am sure I would have more problems than owing £134000

What are the realistic risks of losing serious cash over and above my deposit when betting £20 per point on the FTSE.

Hope this makes some sense!

Dave

Looking at my FTSE100 data dump (going back to 1984, but some missing from 80’s and 90’s), the biggest move was +431pts on 19 Sept 2008, but we have had 16 instances where it moved more than 250pts up or down and 64 instances when it fell by more than 159pts. The biggest fall was -391pts on 6 Oct 2008. While the average performance is very close to breakeven on a daily basis, if we take every move (positive or negative) the average move is 33pts either way and the median 20pts. I hope this helps.

 

[discodave82]

Hi,

Thanks for this that's exactly the sort of thing I was looking for

Dave

 

[the pro]

Hi,

Thanks for this that's exactly the sort of thing I was looking for

Dave

Remember, though Dave, we haven't seen the biggest move yet. If you have a standard stop in place, you have only got to worry about gapping.

if you are watching the screen as you trade and I assume you are, are you out of every position overnight, if so it's the intraday moves that concern you, not the opening to close on any one particular day.

 

[tar]

Take a look at this :

http://www.trade2win.com/boards/spread-betting-cfds/45904-spreadbetting-ig-complaint.html