How to Measure Risk in a Forex Managed Accounts ?

When i get into an aircraft, i like to see some gray hair on the captain. It gives me confidence and puts a smile on my face as I settle down to my first drink. My assumption is that he has been around a while and likely to have seen some spooky times. It is no different with the Algorithmic-Trading Robots in Forex Managed Accounts.


In this post i am writing about a risk – how it is calculated today in the Forex managed accounts and how to calculate a better real risk measurement, that I have specially developed for the Forex trading. Risk – this term means many things to many people, but in todays Forex market a risk is mostly defined as how much drawdown has to your investment portfolio.


For example, during the life time trading of the Engineering Investments’s portfolio, its has a drawdown of 692€ In the below chart we could see the MFE and MAE distribution graphs of this investment portfolio. Maximum profit (MFE) and greatest loss (MAE) values are recorded for each open order during its lifetime. These parameters additionally characterize each closed order using the values of the largest unrealized potential and most permitted risk. MFE/Profit and MAE/Profit distribution graphs display each order as a point with received profit/loss value plotted along the X-axis, while most displayed values of potential profit (MFE) and potential loss (MAE) are plotted along the Y-axis.

MFE and MAE Distribution Point Graphs
MFE and MAE Distribution Point Graphs.

The above drawdown of 692€ has included the both sides of the hedge trading (when exists). It means we have to deduct the smaller side from the greater side drawdown, and then getting the corrected drawdown.


In addition, we have to know the value of the CCI Indicator.The CCI indicator is very useful when we are about trading with commodity, as well as the CCI is correctly adjusted to our trading time frame. It just gives us the chance that the current trend will be turned over.


Now, we could use the below formula to get the real risk of our current trading portfolio, that I have called it RR:


Robin Risk Formula for Forex Managed AccountWhere Lambda in Robin Risk Formula= 1000 = Systematic Risk Coefficient.


In Engineering Investments‘s example we have 692€ drawdown which should be corrected to 650€. Now, we divide the 650 by the portfolio equity, which is 3200€ To calculate the theoretical risk we begin with 650/3200 = 0.20 (20% is the most used drawdown) and then multiply this with the currently CCI, which in our time of measure was 120. The calculation is :

(650/3200)*(1-(120/1000)) = 0.176 = 17.6% , which is the real risk or Robin Risk in this portfolio.


Moreover, in the next posts i will write more about this important subject, as well as how this formula has been implemented on our portfolio such it enables us to get a high gain on investment with the lowest risk !



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Theory of Financial Risk and Derivative Pricing: From Statistical Physics to Risk Management

Features: Used Book in Good Condition
By (author): Jean-Philippe Bouchaud, Marc Potters
Summarizing market data developments, some inspired by statistical physics, this book explains how to better predict the actual behavior of financial markets with respect to asset allocation, derivative pricing and hedging, and risk control. Risk control and derivative pricing are major concerns to financial institutions. The need for adequate statistical tools to measure and anticipate amplitude of potential moves of financial markets is clearly expressed, in particular for derivative markets. Classical theories, however, are based on assumptions leading to systematic (sometimes dramatic) underestimation of risks.
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