I have transferred 90% of deposit from FXCM to alternative broker. Situation with FXCM is unclear. They have increased margin requirements - it does not make sense now to trade with them.
Hi Vincevit,
Here is the press release we just issued:
[B]FXCM to Forgive Majority of Clients Who Incurred Negative Balances[/B]
NEW YORK, Jan. 28, 2015 (GLOBE NEWSWIRE) – FXCM Inc. (NYSE:FXCM), announced today its decision to forgive approximately 90% of its clients who incurred negative balances in certain jurisdictions, on January 15, 2015 as a result of the Swiss National Bank announcement on that date. FXCM will notify the applicable clients and adjust applicable client account statements in the next 24-48 hours. “FXCM worked diligently to reach this decision and we are extremely appreciative of our clients for their patience and loyalty as we worked through this,” said Drew Niv, CEO of FXCM.
The SNB announcement, extreme price movements and the resulting lack of liquidity were exceptional and unprecedented events causing many market participants to incur trading losses. These events were unforeseen and beyond the control of FXCM.
FXCM will also notify certain clients (such as institutional, high net worth, and experienced traders who generally maintain higher account balances) requesting payment of negative balances, pursuant to the terms of the FXCM master trading agreements. This group represents approximately 10% of clients who incurred negative balances which comprises over 60% of the total debit balances owed.
Read the full press release: FXCM to Forgive Majority of Clients Who Incurred Negative Balances (NYSE:FXCM)
As a publicly traded company, please understand there are some things which I can’t discuss until the information is ready for release on a wide basis so thanks for your patience. Those of you with a negative balance should be receiving an email today.
Jason
Hi Everyone,
I wanted to let you know that the minimum margin requirements on FXCM UK and FXCM AU accounts are being lowered from 2% down to 1% allowing you up to 100:1 leverage on most major currencies. You should see this reflected on your platforms later today. Attached are PDFs of these updated margin requirements for FXCM UK and FXCM AU. Minimum margin requirements on FXCM US accounts will remain as shown here: FXCM US Forex Margin Requirements
FXCM UK & AU Forex Margin Requirements - Jan 28.pdf (91.4 KB)
Sorry to dig up an old thread but hopefully you can answer this for me as I don’t seem to be allowed to send you a private message.
With such astonishing losses, would you mind explaining your Money Management and Risk tactics that allowed you to ‘only’ lose 40% for what would have been [U]massive[/U] (negative equity) problems to most traders?
Again, this is how I’m thinking at the moment, so could you again care to explain how you approach things.
Would really appreciate it and feel it could prevent many traders running into enormous problems later in their trading careers.
Hope to hear soon
If you read the whole threads you’ll understand what happened
There were a few reasons. At the time I thought I had a pretty good risk mitigation strategy and I did, but I have since made another key improvement. The most important reasons are as follows:
1). The main reason I didn’t go negative was because I use very small positions compared to shorter term traders. I was long GBP/CHF at 1.55345 with a stop loss order at 1.52500. So my stop loss was 284.5 pips from my entry. Most short term traders would think that a 284.5 pip stop distance was insanely huge. You will no doubt find no shortage of fx traders using 30 pip stop distances or even 10 pip stop distances.
When the mayhem was unleashed, my stop was triggered and filled at 1.33576 (1892.4 pips below the trigger!!!). So the total loss was 2176.9 pips! So with an original stop distance of 284.5 pips and a realized loss of 2176.9 pips, my loss was 7.65 times larger than my initial intended risk on this trade. I had set my position size to 2.6% of my closed account equity (many would tell you that is actually very large). So I lost 7.65 times 2.6%, which is 19.89% on that trade.
Imagine if I had a 10 pip stop with a position size that set that 10 pips to just 1% of my account value. Many would say: “Oh that 1% is much less than Adrian’s 2.6% risk.” But 2176.9 pips is 217.69 times larger than those ten pips. So a ten pip stop set at 1% would have put my account 217.69% down (negative 117.69%) on this one trade.
My position size fixed my percentage risk at .009136% (less than 1 basis point) per pip (19.69%/2176.9=.009136%). If I had a ten pip stop at 1%, each pip I lost would have been .10% (ten basis points per pip). That ten pip-one-percent stop would have been over 10 times more risk.
2). Another reason my account did not go negative was because I had enough cash in it to make margin requirements. This is really just another aspect of having smaller position sizes. The improvement I have made is to actually keep LESS cash in my trading account and keep most of my cash in a bank at home. If this happens all over again, my trading account will go negative and I will be getting negative balance forgiveness like most of the other traders out there while most of my cash is safe here at the bank at home, ready to deploy toward the next trade. Even with my lower percentage risk per trade, I could have been wiped out had the move been twice what it was (I had two other swiss positions, the GBP/CHF one lost the most, total losses for the day were about 50%).
3.) An additional but less important reason my account did not go negative was because I trade many pairs. The event caused the euro to fall sharply and I had multiple euro short positions on at the time. So while my realized losses were huge, my unrealized balance did not fall by near as much because other positions improved.
So a more encompassing answer as to why I was not wiped out is because I was deploying a long term diversified trend following strategy, a strategy which includes smaller position sizes than a short term strategy and diversification through trading many pairs.
You can also see my blog entries from the 15th, 20th, and 25th of January that relate the details of my losses and my take-aways from the event.
Diversified Trend Following Advantage
One may look at a diversified trend following trader and find that his account is holding positions amounting to 25 to 1 leverage and say: “Woah! You are risky bro!” At least, I was thinking that. But that one simple ratio (25 to 1) can be deceiving. Example:
Trader Shorty has a USD $1,000 account and puts on 10,000 units with a 10 pip stop in a GBP/CHF long trade when USD/CHF is 1.000. He is levered 10 to 1 and he will lose $1.00 per pip which is $10.00 if his stop is hit (he is risking 1.0% of his 1000).
Trader Lengthy also has a USD $1,000 account and puts on 1,000 units with a 250 pip stop in a GBP/CHF long trade when USD/CHF is 1.000. While this one trade is the size of his account value, he already has 24,000 units in trades open across 15 other pairs so he is levered 25 to 1. But he will lose only ten cents per pip on this trade which is $25.00 if his stop is hit (thus he is risking 2.5% of his 1000 on that trade).
A 1000 pip move in GBP/CHF against Trader Shorty will wipe him out completely. The same move would only put Trader Lengthy down 10%. The market would need to blast through ALL of Trader Lengthy’s stops and hand him a 400 pip loss in ALL his trades (a total of 10,000 pips) to wipe him out. And some of his trades include a short in GBP/USD and a short in EUR/USD which likely would move toward profitability for him in such a panic. So more markets will have to move and produce a lot more mayhem to wipe Trader Lengthy out.
This is why Diversified Trend Following is robust. I should mention that truely diversified trend followers trade a lot more markets than just FX. Many of them risk only 50 basis points with stops as wide as a ten week range. Winton Capital Management is one of the largest and most successful hedge fund shops ever. It manages diversified trend following funds. They did not lose much Jan 15.
You can listen to Jerry Parker talk about how his fund did in this interview just days after:
Trend Following Offers Diversification and Risk Mitigation | Jerry Parker, Chesapeake Capital | #64 | Top Traders Unplugged
Anyways, sorry that was long. I need beer.
-Adrian
This is one of those posts I want to print off and stick on my wall, excellent excellent post. Thank you.
I have raised a few points (see above) that hopefully you could touch on a little more/confirm for me:
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By using much smaller position sizes, I assume therefore you either have to make an enormous amount MORE in pip value to make worthwhile money (on smaller accounts) or simply trade with a much much larger account?
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Could a trader for example decide to only trade $5000 per 2 mini lots? That way, the trader would have to suffer a 2500 pip loss/slippage to be wiped out? And as added security, only trade in negative balance accounts with only a fraction of the $5000 at any given time? That way you should be protected by the negative balance, but should you be unlucky and they chase you, you still 'should have the required funds (providing you didn’t lose more than 2500 pips? (and then of course apply money management in the sense of once you reach $10000 trade 4 mini lots etc)
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Perhaps I’m a little dumb but I don’t quite understand the percentage risk part with the basis point. (bold bit) Could you elaborate on this?
Hope to hear soon and thanks again for the response.
Hope the beer was good:18:
I will start with this. A basis point is one percent of one percent. Look at the percentage number: 35.64% “35” is the number of percentage points in that number. “64” is the number of basis points in the number. More examples:
42.87% is forty two percent and eighty seven basis points.
0.13% is just thirteen basis points.
0.50% is half a percent. It is also fifty basis points.
Twenty five basis points is one fourth of a percent: 0.25%
When you put on a trade, depending on how big your position size will be on the trade, you fix a given percentage or your account value to each pip you win or lose.
Long term trend followers like Jon Boorman often risk less than 1% on a trade. In this interview he mentions risking just 0.25% on a trade (twenty five basis points on a trade).
But sometimes they can put on much larger percentages, how they make those decisions can be a lengthy and intricate discussion.
The account size does not matter. Yes, long term trades lose/earn more pips. But the number of pips lost or earned only has meaning in the context of the percentage of equity fixed to each pip. Have a look:
The EUR/USD trade above began on December 17. I will use your example of a $5,000 account to illustrate how it has worked out thus far. The initial stop was about 205 pips. Suppose then that I wanted to risk 1% of my $5,000 on that trade. 1% of $5,000 is $50. $50 divided by the 205 pips between my entry and my stop loss is 24.39 cents per pip (50/205=0.2439). I can’t risk exactly 24.39 cents per pip because I have to trade either 2 or 3 microlots and I cannot trade fractions of a microlot. So I round down and trade 2 microlots. So with two microlots I risk 20 cents per pip. With the 205 pip stop distance, my initial risk is $41.00 which is 82 basis points (41/5000=.0082) Twenty cents is 0.00004 of my $5000.00. So for every pip I win or lose my account changes by just 0.004% (just four tenths of one basis point).
Seems tiny right?
Since the trade began the EUR/USD pair has moved favorably for that short trade. The entry was 1.23813. The darker green line of medium boldness which started to decline in mid February is the ten week high for the pair. I moved my stop along that line (keeping my stop just a pip or two above it) as it fell over the last few weeks and now the stop loss for that 12/17 short trade is at 1.16862. That is 695.1 pips below the entry (1.23813-1.16862=695.1 pips).
So the trade originally risked 205 pips and is currently sitting with a stop loss that if filled would lock in 695.1 pips in profit. Winning 20 cents per pip, that is $139.02 which is a 2.78% return on a $5,000 account (139.02/5000=.0278). Put another way, at four tenths of a basis point per pip, 695.1 pips has earned us 2.78% (.00004*695.1=.0278)
Having risked 82 basis points (0.82%) and having “locked in” 2.78% I have a +3.39R trade. If you are not familiar with R multiples read page 143 in Trade Your Way to Financial Freedom by Van Tharp. That book is a must read by the way. +3.39R simply means that the trade earned 3.39 times more than it risked. “R” was the initial risk. It can be expressed in pips, ticks, dollars, or a percentage of equity. In this case I have chosen percentage of equity (0.82%; 82 basis points).
Now I know that when you see this you think: “You mean a trader with a $5,000 account did a trade that took months and only earned a measly $139.02, 2.78%?!?!?” Yes, but he did 12 other trades just as big during that time so his account is not just up 2.78% but it is up 33%. That is why diversified trend followers trade so small, because they are trading in many markets and their total trade size is actually huge. Many “pyramid” into bigger positions or total levels of leverage.
Example: Suppose you have a $5,000 account. You put on a position of 5,000 units at 1% risk between your entry and your stop. After a while you move that stop to a profitable level so your total open risk is ZERO (if your stop is filled on target anyway). So you take another trade in a different market of 5,000 units at 1% risk between your entry and your stop. Now you are leveraged 2 to 1 but you still only have 1% risk in the market (if your stops are filled on target of course).
Then, you move the stop on the second trade to a profitable level and the stop on the first one even deeper into profit as they move in your favor. So you put on a third trade in a third market of 5,000 units at 1% risk and now you are levered 3 to 1 with only 1% risk between your entry and stop.
See where this is going? Eventually you have 19 positions or so and your account is levered 19 to 1 but you still have just 1% or less at risk between your entry and your stop with most of your trades locking in profits.
That is pyramiding into greater levels of leverage.
Keeping only a small portion of my total trading capital on account with my dealer is my own protective decision. I don’t know that it is popular among major trend following traders or CTAs. That said, Scot Billington of Covenant Capital DOES promote that sort of concept. He mentioned that in his interview with Niels Kaastrup Larsen (I highly recommend listening to his interviews).
I may be throwing up too much into one post.
-Adrian
Very interesting post again, thank you.
That clears that up for me now. I understand how risking lots of smaller amount, but across lots of pairs allows for increased returns but individual reduced risk.
It does seem however you do rely on making a lot of pips to make a decent amount of money. This strategy doesn’t seem like it could apply to say a pattern trader, or shorter term one who’s targets are not so large, or isn’t in trades for a longer period of time?
referring to the quoted part, in regards to establishing how much to risk per trade… surely this depends on stop loss placement? obviously 10 pip stop loss has a much higher percentage per pip value at 1% account risk, apposed to a 300 pip stop loss…
So how would one decide how much to risk per trade - stop losses vary to each and every trade making 1% different levels of risk (should slippage happen like EuRChF)
Hope to hear soon,
Diversification is typically talked about for its risk reduction benefits: “Don’t put all your eggs in one basket.” Diversified trend followers trade many markets for an even more important reason: to maximize profit opportunities.
Suppose you are trend following in just the USD/JPY pair and nothing else. From January to September of 2014 you were very disappointed. But if you were in EUR/AUD, GBP/CHF, USD/RUB, and/or USD/CNH during that same period you had some profits.
Jerry Parker was one of the original Turtles and he continues to trade professionally to this day. It may be easy to notice that trend followers believe nobody can predict the price of the Dow for the 31st of July 2015. But that is not all they believe cannot be predicted. Trend followers do not believe that anyone can predict which market will have a big move at all. Will oil continue down? Will oil be flat till 2017? What about oats? What about EUR/GBP? “Nobody knows, especially not me” says the trend follower. So in order to have an opportunity to profit from whatever trend may emerge in whatever market it may, trend followers try to have orders ready to benefit them in EVERY market they can. Jerry Parker’s firm: Chesapeake trades about 140 markets. About 40 are currencies.
While Mark Whitmore of Whitmore Capital Management is not a purist trend follower like Jerry Parker, he is in some sense a trend follower that manages a fund specializing in currencies. Listen to his discussion with Niels Kaastrup Larsen here.
While reducing risk is a benefit of diversification, the more important reason is the increased profit opportunities.
Trend followers have to catch a lot of pips, but they don’t have to do it in one market. Trend followers have no targets, they let profits run until they stop running. So they may catch 2000 pips on one trade. And they may do so on many trades. And no, this is not for shorter terms with profit targets. But even when trend followers catch 100 here and 100 there, they can stack up great profits because they can get profits from so many different markets.
Now this is the big tough question that I have spent the most time trying to answer for myself. I even started a thread on it. What I have decided is that I have a budget system that allows me to allocate risk depending on the risk I need available to trade markets I am not yet in should a breakout occur. It also varies the total percentage risk I will take on depending on my depth of drawdown in order to cause my balance to asymptotically approach a set drawdown amount rather than zero. That is a lot to swallow and would take a lot to explain. A key aspect of it is explained here.
Anyways. I hope you have plenty to chew on mentally. I tend to lose myself in market and trading theorizing often.
-Adrian
This approach to trend following seems quite interesting and would like to hear more about it. Do you have any posts/books/recommendations etc that I could perhaps learn more regarding the strategy and how it works?
Interesting… the way I’ve always thought might be good way to monitor position sizing is as follows, in regards to avoiding black swans too feel free to critique:
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Based on your pairs and past events, allocate the maximum likely-hood of slippage and big moves (all previous big news, black swans etc) - say it’s 2000 pips.
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Now establish that for every $2000 in your account, you can only risk the amount that would cover 2000 pips slippage. So in this case, $2000 per every mini lot (at $1 a pip as a 2000 pip move wouldn’t put you in negative equity)
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every X increase or decrease in account size as a result of trading, reduce or increase lot size accordingly… for example account loses 15 trades one week, and is down 500 pips. Position sizing adjusts accordingly so that you always have funds for slippage… in the above example it would be $1500 (new total) / 2000 = 0.75 per pip (then work it out in lots tradable)
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Then, (in regards to your forum question) should you have 50 losing trades in a row, your account isnt wiped, because the position sizing is decreasing in relation to the size of the account (imagine halfing a piece of paper, you’d never run out of paper) … and in this case, position sizing keeps scaling down.
Would like you hear your thoughts…
I just heard this today:
Listen to Trend Following with Michael Covel online
Original Turtle Brian Proctor talks about how he was only mildly effected by the swiss move. It was because his position size was small. A 20% illiquid move in the franc moved his account just 2%.
-Adrian
If you haven’t read Michael Covel’s stuff, do so. There are many Trend Following blogs out there too.
Following the Trend is Andreas Clenow’s blog. He has a book out, but I have not yet read it.
I think it is best to assume any pair could slip 50%. We have no way of predicting anything. In fact, a pair could go to ZERO. That means we should actually trade small enough for anything we are in to go to ZERO and still survive.
That position size should be small enough on the entry and not adjusted intratrade. The main reason is because the black swan can hit at any moment after your entry is filled.
Fixed fractional position sizing is popularly understood. If you risk 1% of your account value and had an infinite number of losing trades, as long as you have granularity your balance would asymptotically approach zero (and thus always be positive). That idea is pretty widely known.
What I am doing is one extra step up from that. Rather than asymptotically approach ZERO, I have set my position sizing such that a string of losses will cause my balance to asymptotically approach something more than ZERO. Arbitrager on Acid - ARB/LSD: FIXED FRACTION OF PREDETERMINED MAXIMUM ALLOWABLE DRAWDOWN POSITION SIZING ALGORITHM - A VARIABLE % RISK PATTERN
Imagine you want to risk 1% and you have $100. You could put $50 in your dealer account and
$50 in your bank account and risk 2% of whatever is in your dealer account. Your first position would risk 2% of $50, which is $1 and which is 1% of your total $100. So you are still risking exactly 1% of your $100.
Then you lose the $1 and you have $49 in your trading account. So you risk 2% of $49 which is 98 cents. Then you lose that and have $48.02. So you risk 2% of $48.02 which is 96 cents. Then you lose that and have $47.06. So you risk 2% of $47.06 which is 94 cents. And you lose that… etc. This pattern keeps the fixed 2% of the trading account as the percent risk but each time the balance falls it DECREASES the % risk on the overall balance in the dealer and bank accounts combined. When you risk that 94 cents with $47.06 in the dealer account, you are risking less than 1% of the total $100. And if you could go on infinitely your dealer account would asymptotically approach zero while your bank account stays nicely at $50. Thus, this pattern decreases the percentage risked through a series of losses to cause the total balance to asymptotically approach $50 not $0.
I thought all of that through and decided to do it and even made my blog post about it. Then, the very next day I was at a book store and I read Futures Mag. I was astonished to find Scot Billington actually advocating it right there in the magazine! So I edited my blog post to include quotes from the article.
It is now part of my overall strategy. It is a crucial piece I have been trying to work out for some time.
-Adrian