Negative Balance Protection

This is a discussion on Negative Balance Protection within the Brokerages forums, part of the Commercial category; risk capital is just the sum of money youve set aside to risk in the market in any way you ...

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Old Mar 1, 2016, 7:33pm   #16
 
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risk capital is just the sum of money youve set aside to risk in the market in any way you choose.
any monies you have on deposit with a broker is at risk, position or no. a trader can have 1/10 of his risk capital with his broker and the other 9/10 under their pillow. they can trade that account 10x and remain sized overall the same as a 1x trader, but with much less counterparty risk of the broker.

Re no neg balance.
Nothing is guaranteed, but, say the OP has 10% of his r capital with a no neg balance broker. Hes plodding along 1 to 1 overall when the hes buttficked swiss style!..
At the very least, he has the chance of not having to fund the account to cover those losses.
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Old Mar 1, 2016, 7:50pm   #17
 
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Quote:
Originally Posted by darktone View Post
risk capital is just the sum of money youve set aside to risk in the market in any way you choose.
any monies you have on deposit with a broker is at risk, position or no. a trader can have 1/10 of his risk capital with his broker and the other 9/10 under their pillow. they can trade that account 10x and remain sized overall the same as a 1x trader, but with much less counterparty risk of the broker.

Re no neg balance.
Nothing is guaranteed, but, say the OP has 10% of his r capital with a no neg balance broker. Hes plodding along 1 to 1 overall when the hes buttficked swiss style!..
At the very least, he has the chance of not having to fund the account to cover those losses.
That is not how I trade and it is not how I recommend anyone trade. I prefer investopedia's definition to yours. I consider the money I have with my brokerage firm to be, for all intensive purposes, in another universe, separate from any other assets. I treat all my assets as if they were in separate universes unable to interact with each other.

I do not think that people should invest with money that they cannot afford to lose. Having negative balance protection means that you are almost betting upon the fact that at some time you will blow up your account and that you are doing trading that endangers your account of this happening.

If you remove the means, the ends cannot transpire. Remove the possibility of a negative balance.

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Risk capital consists of investment funds allocated to speculative activity. Risk capital refers to funds used for high-risk, high-reward investments such as junior mining or emerging biotechnology stocks. Such capital can either earn spectacular returns over a period of time, or may dwindle to a fraction of the initial amount invested if several ventures prove unsuccessful.
I said that most of my capital is risk capital by this definition. I do not do hedge trading. My risk is mostly speculative risk.

Hedging involves more pure risk, which is why they are hedging to decrease risk.

Quote:
Pure Risk: There are only two possibilities; something bad happening or nothing happening. It is unlikely that any measurable benefit will arise from a pure risk. The house will enjoy a year with nothing bad occurring or there will be damage caused by a covered cause of loss (fire, wind, etc.). Predicting the outcomes of a pure risk is accomplished (sometimes) using the law of large numbers, a priori data or empirical data. Pure risk, also known as absolute risk, is insurable.
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Speculative Risk: Three possible outcomes exist in speculative risk: something good (gain), something bad (loss) or nothing (staying even). Gambling and investing in the stock market are two examples of speculative risks. Each offers a chance to make money, lose money or walk away even. Again, do not equate gambling and investing on any other level than as both being a speculative risk. Gambling is designed to enrich one party (the house); the odds are always in its favor. Investing is designed to enrich all involved, the house that set up the “game” AND those that chose to place money in the game – all participants with “skin in the game” win or lose together. Speculative risk is not insurable in the traditional insurance market; there are other means to hedge speculative risk such as diversification and derivatives.
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Old Mar 1, 2016, 11:28pm   #18
 
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I agree. Your rc monies certainly could be in another universe if you woke up the morning of October 31, 2011 with a MFG acc, at least for a while.

If we take two traders, both with 10k of capital they fully emotionally and financially prepared to put at risk and lose. Both open the same no neg balance acc with the same broker.
Trader A funds his acc with the full 10k and limits his total notional risk to no more than 10k.
Trader B funds his acc with 1k and trades 10x with a total notional risk of no more than 10k.

Buttfick occurs and affects both traders in exactly the same manner at they are both mysteriously positioned pip per lot per pip in the same instruments. The broker survives and when the quotes hit the screens both accounts have hit zero.

Trader A is out the full 10k and off searching the jobs ads in the local rag to go again, at some point in the future.
Trader B is out the full acc at 1k on the unrealistic no neg bal good graces of the broker and has 9k left to fund an acc of their choice.

sooooooooooooo
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Old Mar 1, 2016, 11:57pm   #19
 
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Originally Posted by darktone View Post
I agree. Your rc monies certainly could be in another universe if you woke up the morning of October 31, 2011 with a MFG acc, at least for a while.

If we take two traders, both with 10k of capital they fully emotionally and financially prepared to put at risk and lose. Both open the same no neg balance acc with the same broker.
Trader A funds his acc with the full 10k and limits his total notional risk to no more than 10k.
Trader B funds his acc with 1k and trades 10x with a total notional risk of no more than 10k.

Buttfick occurs and affects both traders in exactly the same manner at they are both mysteriously positioned pip per lot per pip in the same instruments. The broker survives and when the quotes hit the screens both accounts have hit zero.

Trader A is out the full 10k and off searching the jobs ads in the local rag to go again, at some point in the future.
Trader B is out the full acc at 1k on the unrealistic no neg bal good graces of the broker and has 9k left to fund an acc of their choice.

sooooooooooooo
Soooo, nothing! Trader A is more than 10 times less likely to blow up his account regardless. Trader B will have to trade with much tighter stops. A 10% loss will result in a 100% loss of capital. Trader B will have an infinitessimally lower chance of experiencing a 100%.
  1. He should not be trading a single financial instrument at one.
  2. He should not be exposing the entire $10,000 at whack, even if he is trading a single financial instrument.
  3. If you remove the means, the ends cannot happen. If he does not leverage or trade CFDs, the negative balance protection is moot and not necessary.
  4. If, instead, he opens 10 trades with a cost basis of $1,000, there is a 1/1x10^9 chance that all 10 trades will be unprofitable. There is a 50/50 chance a trade will be unprofitable with a single open position. There is a 99.5% probability that at least 4 trades will be profitable.

    See hypergeometric probability density function.
    http://www.math.uah.edu/stat/urn/Hypergeometric.html

Trader A is also not likely to be reading the classifieds even if he loses the $10,000 because he should not have invested with money he cannot afford to lose.

Trader B is more likely to blow up his account more times and more frequently due to the tight stops required for his trading style resulting in the same amount of loss.
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Old Mar 2, 2016, 12:04am   #20
 
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Trader A and trader B trade in exactly the same manner and methodology. Both trade with no stops. Both can and more importantly fully accept the fact that they can they can lose their entire rc wad.
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Old Mar 2, 2016, 12:11am   #21
 
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what color is this?

Click the image to open in full size.
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Last edited by darktone; Mar 2, 2016 at 12:18am.
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Old Mar 2, 2016, 12:58am   #22
 
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=darktone;2514141Trader A is out the full 10k and off searching the jobs ads in the local rag to go again, at some point in the future.
Trader A is also not likely to be reading the classifieds even if he loses the $10,000 because he should not have invested with money he cannot afford to lose.

They are not the same methodologies. They never will be. Trader A does not use leverage and Trader B does.
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Old Mar 2, 2016, 7:04am   #23
 
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Traders A and B both have contingency funds far in excess of their risk capital that are strictly not for trading purposes. They both have the same job at the same pay, the same life situation with the same cash burn. The loss of 10k does not affect their lifestyle in any way outside of trading.

Traders A and B both uses the exact same linear regression method to define and execute their trades. They took the same trades at the same time at the same size.
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Old Mar 2, 2016, 7:25am   #24
 
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so what is this this colour?
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Old Mar 2, 2016, 8:47am   #25
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Green lol
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Old Mar 2, 2016, 2:49pm   #26
 
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Originally Posted by Forexmospherian View Post
hhiusa

I take your point and agree with some of your comments as well

Remember this site is a retail traders site and not a commercial trading group discussion forum - so the subject covered will be maybe unusual for you as I think you are trading using rules commercial institutions would use.
I have been waiting 10 months for someone to clarify this. I am probably the smallest of the big fish as far as institutional trading. Institutional trading does not necessarily imply that you have billions of dollars. Trading as a firm does give you more investment avenues, even if they only have the same cash as you.

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Originally Posted by Forexmospherian View Post
I use 100:1 leverage on a approx $70K on one of my accounts

Now if I only uses a leverage as you and Banks recommend - I would need to deposit 20 times more capital - ie $1,400,000 - to trade at my maximum lot size.

2 years ago I was using leverage of 200:1 - but I did not use all of it and I have in the past had small account with 500:1 leverage - and have not blown any account up since my first year well over a decade plus ago.

If I only used say 10:1 leverage - my ROC would be drastically reduced

OK if I was not making consistent money but was say a "break even or only 10% a year" trader - then lower leverage might be an aid.

I look forward to you explaining how you work out your stake size - ie is it still just 1 or 2% of your capital base on just 5:1 leverage - ( mines 0.3 to 1% ) nowadays on leverage of 100:1 - because of tight stops - but with you not using stops then for example on your GU buy trade - I can only see you making small returns even if you exited when it was up over 140+ pips ?

Also because I am only FX - never traded any other instruments - I am totally naive on all other forms of non FX trading - so I am sorry I can only relate to my field

No rush

Regards

F
When you stake size, do you mean the percentage or amount of money I allocate to one trade relative to another trade? When diversifying, I use a risk metric from statistic. It is calculated on a per diem, per equity basis.

I use some mathematics and generate a probability of success. For example, if I am going to buy 4 equities today, the cash will not be divided up evenly, i.e. not (25% x 4). As for the expect return, it varies from 1-3% per trade. I use 1-3% take profit most times. I do not use a stop loss. If the equity drops 1-3%, then I buy more and decrease my average price.
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Old Mar 2, 2016, 4:15pm   #27
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Hi hhiusa

Not long back at my desk and so will go through your last comment and then try and answer every point etc

Hopefully within next 3 hrs after I have finished off day trading today

Regards

F
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Old Mar 2, 2016, 6:44pm   #28
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I have been waiting 10 months for someone to clarify this. I am probably the smallest of the big fish as far as institutional trading. Institutional trading does not necessarily imply that you have billions of dollars. Trading as a firm does give you more investment avenues, even if they only have the same cash as you.

I can understand you looking at trading as a firm to take advantage of of the US tax rules and regulations etc - so that's OK - but I suppose in Europe most traders are not looked as being commercial until they have a capital account over a few million dollars - and then they work at it maybe full time or certainly not as a part time hobby.

If we look at the results that we hear are made on an annual basis from commercial organisations like small investment groups and hedge funds etc - you expect results from over say 20% per annum up to even 50%. Now if your capital account contains say $2.million then even 20% per annum ROC is a nice return and easy enough to employ a trader full time. On $5 - 10 million plus then I would be delighted with 20+% per annum ROC and then you would not use any leverage of more than say 10:1 - far too risky - ie 20% off a $50k account is only $10k - just a 10% loss on a $5 million account is $500k ( frightening ;-) )

Now in Europe - most retail traders start off with anything from say a few hundred dollars to say $5k. Not many retail traders are full time and so its more of a part time hobby and those guys who are full time retail ( remember maybe only 5% to 20% of all the retailers) maybe work on capital accounts from say $50k to maybe a maximum of $500k. As you know - European traders are not limited to low leverage of under 50:1 or even as low as 20:1. They instead want 200 :1 + but they are not really bothered about it if they only have $500 or say 2k to lose.

However the recent Black Swan events since 2008/9 - and 2011 and 2015 etc have made many retail traders suddenly read the small print and realise that if they do have a small capital account of only a few thousand pound and they have leverage over say 200:1 or more then in worst case scenario if they are in a trade with no stop and the markets goes against them - their accounts are not always closed with a margin call and instead its too late and their bad trade instead of only costing them the full $2k of their capital account - they might owe the brokers say double or even five fold more - and this then totally changes the ball game.

So negative balance clauses guaranteeing what ever happens they cannot lose more than their Capital account value become important - (ie a great safety net for the unexpected black swan event)

You would not get that with a commercial organisation or I don't think you would get it with retail capital accounts over $100k + - that I am not sure of

Also although European brokers segregate their traders funds - if it did get "used" in a fraudulent way the FSA ( Financial Regulators for the UK) cover up to either 50k or 80K ( need to check as amount in a bank is different to in a brokerage) as long as the broker is a member of their organisation and abides by their rules

Back again to the European retail traders - because they are only using small capital accounts they take advantage of leverage and of course ideally want returns of anything from 50% to 300% per annum. This is not possible to maintain using compounding but on retail accounts it can be that high simply due to small capital and the leverage effect. If the traders are newbies or not experienced as we know maybe 80 % plus will end up losing their first or even two or three small capital accounts

The forum boards are full of traders taking $1k to $15k or even $50k in a few months or year and then losing the whole lot due to bad money management - over trading and wrong stake sizes etc - not forgetting martingaling etc and even averaging down - they all can work for a short term - whether just 2 months or 10 months - but normally long term it leads to lost capital.



When you stake size, do you mean the percentage or amount of money I allocate to one trade relative to another trade? When diversifying, I use a risk metric from statistic. It is calculated on a per diem, per equity basis.

I use some mathematics and generate a probability of success. For example, if I am going to buy 4 equities today, the cash will not be divided up evenly, i.e. not (25% x 4). As for the expect return, it varies from 1-3% per trade. I use 1-3% take profit most times. I do not use a stop loss. If the equity drops 1-3%, then I buy more and decrease my average price.

Can I come back to this part to cover in more detail and let me give you an example based on one of my own FX trading accounts

With you not using stops - but using maths to give you the probabilities of winning and worse case scenarios - it does mean your annual results will be low - ie normally under 25% per annum with no leverage - thats if its a successful strategy

There are so many variables in your trading equation - ie what is the maximum amount of trades you might have open in any one week or month? It will all depend on how successful you are with your winning trades and how quickly you take all or part profits and the % returns you quote for example 2% is that the return on YOUR capital - or just the change in the trades's price or return on the stake size you have used on trade??



First part of trying to answer some points raised

Will cover more later

Regards

f
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Old Mar 2, 2016, 6:52pm   #29
 
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First part of trying to answer some points raised

Will cover more later

With you not using stops - but using maths to give you the probabilities of winning and worse case scenarios - it does mean your annual results will be low - ie normally under 25% per annum with no leverage - thats if its a successful strategy

There are so many variables in your trading equation - ie what is the maximum amount of trades you might have open in any one week or month? It will all depend on how successful you are with your winning trades and how quickly you take all or part profits and the % returns you quote for example 2% is that the return on YOUR capital - or just the change in the trades's price or return on the stake size you have used on trade??

Regards

f
Concerning the questions you have about my trading style, why don't you have a look at my journal? It shows the number of open positions I have at one time. I post the entry price, entry time and share size. I explain what I will be buying if certain conditions are met beforehand.
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Old Mar 2, 2016, 6:58pm   #30
 
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I can understand you looking at trading as a firm to take advantage of of the US tax rules and regulations etc - so that's OK - but I suppose in Europe most traders are not looked as being commercial until they have a capital account over a few million dollars - and then they work at it maybe full time or certainly not as a part time hobby.
I do this full time or at least I do not have to do anything to pay the bills. I never told you how much I have or how much I am managing. You certainly make a lot of assumptions.
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