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Negative Balance: Is it possible to know how bad it could get?

  • #1
  • First Post: Edited 3:48pm May 26, 2016 3:24pm | Edited 3:48pm
Is there a way to tell what my max possible loss could be ahead of a large event? Neither Oanda or FXCM would comment on the max ceiling for possible loss(!). They would not cap it at a certain percentage above 100% of account size - or cite historical averages after the USD/CHF panic event. I was hoping they could cap it at a certain percentage (like 200%), but they would not.

The situation:
*$10,000 account.
*$5,000 max margin used of the 10,000.
*I am long/short in 9 pairs near 100% of the time - I split the 5,000 pretty equally among the 9 - and pretty even long/short split.
*The leverage max is technically 50:1, but trade explorer shows it as using 25:1.
*I would attempt to have $10,000 in a side account in bonds or something as "reserve" for if I saw a greater than 100% (10,000) loss.

My questions:
1.) Is there a percentage this can be capped at? Is 200% safe- with the 100% reserve?
2.) Would trading through an LLC or corporation be able to help? - IE cannot lose more than what was put in to the corporation? Oanda claimed that they have an "Entity account" you can do this with and that you can still lose more than 100% with this account.
3.) Since I split among 9 paris, would I be somewhat safe from this? - this means I would probably only have about 600 of the 5,000 (1/9 * 5000) used in a "problem pair", at any given time, but I could be mistaken.

Does anyone have advice or stories that they can share? Do you just need to approach this with an LLC account and lawyer(s)? Thanks in advance for all of your help! - also, feel free to share any war stories about past events similar to this if you would like.

-Mike

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  • #2
  • May 26, 2016 3:53pm May 26, 2016 3:53pm
Take the max lot you have open and imagine the currency drops for 20 % or more or less. And what are the possible circumstances that could happen (war, tsunami, Brexit, Grexit.....)? Another question is, how many black swan events have there been in Forex history?
  • #3
  • May 26, 2016 6:01pm May 26, 2016 6:01pm
For a liquid pair like EUR/USD I think the risk is close to zero if not zero. The market is highly liquid and even if something crazy happens it will take a while for price to find direction. Just don't trade things that have pegs on them or are heavily intervened with...

Also, use stops and place them near your entry. For me my stops are never wider than 6-7 pips; usually much less. This way you are likely to be the first to get out if anything really black-swanish-crazy starts happening.

This is a good point as it is one of those realities of the FX market that if you fail to consider, trade long enough and you will eventually suffer for it.
Build good relationships with others.
  • #4
  • May 26, 2016 7:54pm May 26, 2016 7:54pm
If it is a big issue for you, one option would be using guaranteed stops
Hope for the best, prepare for the worst.
  • #5
  • Sep 22, 2016 2:23am Sep 22, 2016 2:23am
Quoting shellsnail
For a liquid pair like EUR/USD I think the risk is close to zero if not zero. The market is highly liquid and even if something crazy happens it will take a while for price to find direction. Just don't trade things that have pegs on them or are heavily intervened with... Also, use stops and place them near your entry. For me my stops are never wider than 6-7 pips; usually much less. This way you are likely to be the first to get out if anything really black-swanish-crazy starts happening. This is a good point as it is one of those realities of...

WRONG: stops are NOT honoured after majour black swans!!!!!!!!!
  • #6
  • Sep 22, 2016 2:38am Sep 22, 2016 2:38am
EXCELLENT POST SKILLZ!!!

You share my concerns...The reality is OANDA will never give you a written CAP, cause their own ass is at stake...!
YES being invested 100% of the time increases your risk exponentially..cause black swans do happen.
Without negative Balance Protection, we could end up loosing not only the full account, but everything else including you property savings etc...

Iīm investigating the issue in depth...thereīs definitely a visit to my lawyer planned soon...

My best safety plan so far:
-Trade only intraday, away from news...to keep my exposure to black swan reduced (there is no way of taking the risk away completely , even without leverage, thereīs no protection when your stop is not met by an opposite order...it just wonīt click...BUT at least you wonīt loose more than the full account!!)
-ENTITY ACCOUNTsounds loke an interesting option: then become an employee of the "Entity"...if it goes bust, you donīt loose your house.
-Take out X% of your Money out, and Transfer to a private account...as Profits increase...

THIS IS A HUGE ISSUE ...not payed Attention to by the vast majourity...the Swissy spike should have teached us all a lesson!!
I read documented Posts of People who actually made a huge amount being on the right side that day...but their Brokers handed them thier positions back with a LOSS, saying they needed the $ to pay for the real loosers on their accounts...and, claiming it was all LEGAL...!!!!!!
-
  • #7
  • Sep 22, 2016 2:40am Sep 22, 2016 2:40am
Quoting shellsnail
For a liquid pair like EUR/USD I think the risk is close to zero if not zero. The market is highly liquid and even if something crazy happens it will take a while for price to find direction. Just don't trade things that have pegs on them or are heavily intervened with... Also, use stops and place them near your entry. For me my stops are never wider than 6-7 pips; usually much less. This way you are likely to be the first to get out if anything really black-swanish-crazy starts happening. This is a good point as it is one of those realities of...

FAR FROM TRUE...thatīs just wishfull thinking...brother...
  • #8
  • Sep 22, 2016 2:53am Sep 22, 2016 2:53am
This is an excellent post. I too made enquiries of Oanda and Forex.com and got unsatisfactory vague answers.

Since the chf fiasco, I try to keep the positions very small in relation to the account size (but of course this lowers my profitability). As I always have several pairs open I also try and avoid trading in the same direction on multiple pairs, i.e. all dollar shorts or long. That way a large move in one direction would balance out on the other pairs, but its not the perfect solution. Also draw profits regularly.

I don't trust any of the brokers - my ex-husband died unexpectly leaving a credit balance on his platform. When the solicitors wound up the estate they contacted the broker (Forex.com) and asked for the account to be closed and the funds withdrawn. They replied the balance was zero, and stuck to that despite solicitors questions. However, I had access to that platform, so I rang them and again they claimed a zero balance, so I pointed out that I was actually in the account at the moment and staring at a credit balance of several hundred pounds. Result - silence at that end, then "oh dear they would like into it, then hmmmmmm I might be right, and yes of course they would send us a refund!. Sorry, they had made a mistake."
  • #9
  • Sep 22, 2016 3:57am Sep 22, 2016 3:57am
I have not ever seen a broker who give an opportunity for your trades to be running negatively balance. According to me it is better to close the positions. If balance is going to negative.
  • #10
  • Sep 22, 2016 8:20am Sep 22, 2016 8:20am
Quoting VEEFX
{quote} A simple measure of whether you are overleverage or not is to see the effect of spread widening on your %Margin. Many (if not all) successfully high winrate strategies fail to function if spreads and cost of execution go up. My solution: Trade small size, Enter and Exit Often and quickly via close/reverse, use automation to liquidate positions at a safe distance based on % Margin to avoid margin call with push notifications to alert you. Certainly not a fool proof method but atleast it offers a little bit peace of mind.
interesting
im thinking that with % margin notifications you already are in vely vely deep waters to burn something along the way. the question is what is the number for this? Should one only concentrate that % margin is low - if reaction to close positions while your % margin goes against you? thats vely wicked imo
  • #11
  • Sep 22, 2016 12:00pm Sep 22, 2016 12:00pm
Quoting VEEFX
{quote} I run everything in my books on a % basis as it is universal. Pip based accounting is inconsistent as pipvalue changes based on position size, $ value in pnl changes based on commissions and swaps etc. It just makes sense to run a check on margin level % before opening new positions. I cap MinMarginPctRequiredToPreventMarginCall at 800% before I can add any more. When level drops to 200%, I start closing either max profit or max loss positions or both if(MinMarginPctRequiredToPreventMarginCall >= (AccountEquity()/AccountMargin())*100 then...
ok understood what you mean. but how would you do your calculation of how much risk you deploy on GBPJPY or NZDCAD position..and how would you decide stops, how to measure it.
we can talk about R right.
I mainly use ADR calculation. I deploy 1R(1%) to each position. lets say ADR on GJ is 200 pippers and on NC is 75. whatever weight i take for SL( 1x ADR; 4x ADR etc..) I will always risk 1% on each position. Meaning, notional is gonna be always different.
about the same on your sidE?
  • #12
  • Sep 22, 2016 5:43pm Sep 22, 2016 5:43pm
Back in my futures days I came across a presentation by George C. Lane (inventor of Stochastics). In his presentation he argued that no one should trust any broker - and he traded futures at the Chicago Board of Trade. He argued that regardless of how much capital you have available to you, you should never trust a broker with more than $5000.00. He urged discipline in removing any profits weekly and starting each new week with a balance of $5000.00.
 
If you are truly concerned about your liability over that 5k - register an LLC in an island and trade thru that vehicle. If a catastrophic event occurs, the most you lose is 5k.
 
just mt take on the situation.
  • #13
  • Edited 6:04pm Sep 22, 2016 5:43pm | Edited 6:04pm
One very simple solution if you are working with far away pending orders is to use a virtual/stealth entry. Instead of a hard order you will work with trigger lines that open a trade on price touch. This way if a black swan gap takes place above/below your pending entry, at least the gap will NOT trigger the trade. This will be the case on normal pending orders....

Another solution for you swing traders out there that hold a position longer term (and therefore have a considerable higher risk on black swans), know that a couple of brokers out there work with insurance/guaranteed stops. This usually results in paying extra spread or commision, while having protection against gaps and slippage.

By the way, dont think about smart managing trades (for example hedging) to avoid black swan exposure; stop orders will only become market orders AFTER the gap took place. The same goes for any EA that loops "close open trades when % drawdown reached" and the like, it will not get you out of your order because there simply is no market.

Now i used to make my own virtual pending orders with an EA that i created. It however has big room for improvement.... Is anyone in here using a virtual manager and/or pending stealth scripts, and if so, could you please link it here?
  • #14
  • Sep 22, 2016 11:47pm Sep 22, 2016 11:47pm
Quote
Managing R:R per trade/position/ADR/ATR/etc with predefined risk% is conventional/traditional way of managing risk. That is exactly what MMakers want you to do. It takes 2 seconds for them to figure out what risk model you are incorporating times number of trading accounts, how far to move the market to invoke mass margin calls and liquidations. All that ultimately becomes their overall profit taking 'target' (and hence the line of credit they can afford to offer/draw from on their open book of positions)

If you believe in this..you probably would agree, that if you are trading same direction (impulse) as market maker, than you can anticipate the hunt to predefined levels - hence your TP is there.
Its a mystery to me. Surely there are some hunts out there, but believe me, had several 5+ mio USD notional or EUR orders out there and you would be amazed how many times i got stopped out on the "hunt". 50% of the time probably. we were trading 1-3 pippers out, and they still didnt catch it..and we reversed..or...34 mio of limit order and MM got hit. market reversed at the spot. what did big MM do while it started to reverse? market dont care about this. we are just throwing risk to the other guy.

Quote
With that said, I do have many intensive criteria on what time in a 24 hour market cycle, in which pairs I participate and how frequently and aggressively I should participate (enter/stack). I bring consistency by implementing my entire trading plan in my automation all compartmentalized via robust Account, Position Entry/Exit, Margin, Session, Risk, Money, Exposure, Trend, Range, Error/Alert Handling, trade life cycle and Report management modules to handle every possible scenario across all timeframes and across all pairs.
still you do predefine some risk characteristics. your stop is predefined as per account. on the margin levels. adding and throwing away the risk. nothing wrong with that.
  • #15
  • Sep 23, 2016 3:30am Sep 23, 2016 3:30am
This issue is so BIG, somehow more and more people need to put their brains into it.Thereīs a lot of brain power alone in FF.:nerd:

Just imagine you become profitable and start making real good money..years of hard work, busting your eyes in front of your PC..

THEN: one sweet day, one sweet Black Swan, not only wipes your account, but forces you to sell your house , your car and your dog...

Not possible?...Unlikely?...ask the people who were invested in EURCHF last year...some made a huge profit (on their charts)...some Brokers handed them their positions back...WITH A LOSS...!!

The web is full of documented nightmares like these...of course, many are fighting in court with their Brokers, just to save their dog!!!
  • #16
  • Sep 23, 2016 4:33am Sep 23, 2016 4:33am
Quoting skillz16
Is there a way to tell what my max possible loss could be ahead of a large event? Neither Oanda or FXCM would comment on the max ceiling for possible loss(!). They would not cap it at a certain percentage above 100% of account size - or cite historical averages after the USD/CHF panic event. I was hoping they could cap it at a certain percentage (like 200%), but they would not. The situation: *$10,000 account. *$5,000 max margin used of the 10,000. *I am long/short in 9 pairs near 100% of the time - I split the 5,000 pretty equally among the 9 -...
Why not increase your leverage upto 500:1 and reduce 5000 to 1000. It wont effect you Profits/losses and margin requirements but in case of a crash you can only loose 1000.
  • #17
  • Edited 8:26am Sep 23, 2016 8:03am | Edited 8:26am
I just had a chat with my broker again because i was wondering a couple of things. They are ECN and will therefore fill orders at the first price available to them after a gap took place. So a few of the bad things that will surely happen somewhere in the future, and in which they give zero protection are the following:

1. Pending (stop AND limit) orders will get filled at the first price available to them, regardless of that being 1000 pips below or above the actuall order.

2. Not disabling trading during black swan, even when liquidity is dangerously low before the actuall gap takes place. With their capital they surely have the option to generate a piece of software code to at least disable trading (the opening of new market orders) when liquidity is going down the drain within a 3-5 sec timespan?

3. No insurance / guaranteed stops because of their ECN nature. As mentioned before they are dependent on order books that provide them with price quotes. MM's can provide some kind of insurance but " true ECN's" cannot.

Conclusion is that despite the tragedy of SNB, my broker does absolutely nothing to provide ANY type of protection against future black swans.
Now i have my capital exposed in 21 pairs that i am trading. I am not going to limit this. Black swans can happen in any currency. Probably a high possibility one being historic agreements on oil for commodity currencies like CAD....

Edit: I just made a topic regarding some simple black swan modifications for pending orders. If you are interested you can find it here: http://www.forexfactory.com/showthread.php?t=608135
  • #18
  • Sep 23, 2016 11:25am Sep 23, 2016 11:25am
PLEASE consider this:

Say you hedge the same pair, on a subaccount, instead of using a stop.
I know folks say its the same as a stop, and it adds spread costs.
GRANTED...
(I only daytrade..to avoid taking my exposure to bed.)..

Imagine you open a trade with a 15 pip hedge, instead of a stop....but you add say a 200 pip stop on both sides for extreme situations...
You play your game normally day to day...win and loose...(Im profitable...)

IF one day Black Swan hits with a 1000 pip spike!
THEN: your loosing trade should hit a stop sooner or later.
Your winner should compensate ...maybe even make a small fortune...

The big question: will the Broker honour your stop "somewhere " ...and will your gains protect you from a total margin call, and/or negative Balance?...since you have big profits on one side....
My idea is that, at least this should protect me from a Negative Balance..

OPINIONS WELLCOME!
Btw. I do use hedging sometimes to recover positions...It does work if you know what you are doing...sometimes you end up profiting on both sides...Long and short.
Have a nice Weekend...
  • #19
  • Last Post: Sep 23, 2016 2:15pm Sep 23, 2016 2:15pm
"If that happens (which happens all the time during news spikes), you will still end up with negative balance on one subaccount. "

Yes but Brokers do take money first out of a subaccount that is in the positive, to equalize Margin Calls, actually they warn you about that!
Itīsīs only obvious for them to grab what they can... first!
So my reasoning is, that if thereīs enough on the other subaccount to absorb the loss...why would they bother trying to sell my house?

Iīm not worried about News Spikes, I stay away from them, trade carefully in between...and my normal leverage is far from any margin call danger...

BUT Black Swan?...EURCHF collapsed some 900 pips!!! that day....
Didnīt hurt me either, I trade EURUSD which is almost 100% negatively correlated to USDCHF.
I actually only trade the 5 lowest spread, big volume , uncorrelated pairs...

I understand you divesify to minimize risk...I avoid taking positions to bed to minimize exposure time...probably both will work...the point of the discussion here is to understand the latent dangers....
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