Value at Risk for Metatrader

[a_cats]

Hello all,
do you know any plug-in for metatrader that calculates the value at risk of the open positions?

Thank you

a_cats

 

[Rhody Trader]

VaR is not one simple equation or indicator. It can be determined in different ways, and has some variance in how it's applied - as well as some serious questions being asked about its value. If you're just trading forex then it is unlikely to have much use to you. VaR was developed for use in multi-market portfolios, like the ones banks have.

 

[a_cats]

Thank you for the reply John. I am aware of the limits of VaR, still I believe it could be a fair tool for the approximate sizing of a portfolio of (pairs of) currencies, given some externally imposed daily (or weekly or monthly) loss limits and given the correlation of some pairs.
Would you know anything that works on Metatrader?

 

[PipMuncher]

Forex portfolio is not a phrase you often hear.

Id venture that for most forex taders - if you can work out your VaR from simply looking at your open positions log - you probably shouldnt be tadeing.

If your planning somthing more complex - please do share and I'm sure some of the more experianced members will be able to point you in the right direction...

 

[a_cats]

Thank you for your attention, I really appreciate your help.
As correctly pointed out VAR is a tool used in portfolio management and this is the area where I saw it applied (mainly equities). Nonetheless I see some validity in applying it for the risk management of currency positions.

Let's say that as a trader I have a daily loss limit of 5000 and the VAR 5% over 1 day of a lot of EURUSD is 3000 (just guessing), therefore I could be led to consider positions of 1-2 lots instead of 10 lots if I want to avoid using stop losses.

Of course for this kind of sizing it could be more useful to consider the distance of resistances or supports, VAR would be only a complementary check.

But please consider taking concurrently a long position in EURUSD and a short position in AUDUSD. Given the (generally negative) correlation, the total VAR is not equal to the sum of the VARs or the single position but lower. With even more complex situations VAR could become very useful to evaluate exposure provided you use it with other risk management tools (especially in the tails)

I have never applied VAR in thsi environment but I would like play a bit with this idea to see if it can help

 

[Rhody Trader]

Let's say that as a trader I have a daily loss limit of 5000 and the VAR 5% over 1 day of a lot of EURUSD is 3000 (just guessing), therefore I could be led to consider positions of 1-2 lots instead of 10 lots if I want to avoid using stop losses.

In a case like this you could use something like Average True Range (ATR) and/or Bollinger Bands, which are based on the standard deviation of closing prices. ATR, in particular, is a favorite tool for many traders in determining stops and position size. They use it basically the same way you're talking about using VaR.

But please consider taking concurrently a long position in EURUSD and a short position in AUDUSD. Given the (generally negative) correlation, the total VAR is not equal to the sum of the VARs or the single position but lower. With even more complex situations VAR could become very useful to evaluate exposure provided you use it with other risk management tools (especially in the tails)

Here's the rub with forex when trading multiple pairs. Because there are so relatively few currencies involved (basically only a half dozen or so if you're talking just the majors) your opportunities for diversification are extremely limited. To your example, if you go long EUR/USD and short AUD/USD then you have effectively created a synthetic long EUR/AUD position. Your USD exposures would cancel each other out (or nearly so, depending on your comparative position sizes), leaving you long the EUR and short the AUD. As a result, your P&L will be driven by the cross relationship so long as you have those matched positions.

 

[a_cats]

Thank you John for your reply,
I completely agree on all the points raised.
I need to add that I approach this problem not as a trader but as someone who oversees the combined exposure of more than one trader.
It is complex to consider more than 2 pairs of currencies at time and that's why I am considering VAR.

It is very interesting your point about the potentiality of diversification with currencies, I will look more into it.

Thank you