If you use futures or cfds, how could you say worse case how much you are risking without a hard sl?

Options & Futures
1

If you use are using mean reversion on futures or cfds, how could you say worse case how much you are risking without a hard sl?

 

2

Hi Jane,



It can be challenging to precisely estimate the worst-case risk when implementing a mean reversion approach on futures or CFDs without a firm stop-loss in place. This is due to the fact that if the market goes drastically against you and you do not have a stop-loss in place to reduce your risk, your potential loss on a trade could be limitless.



One way to estimate the worst-case risk on a mean reversion trade without a stop-loss is to look at the historical volatility of the market and use it to calculate the potential loss on the trade. For example, if the market has historically moved an average of 1% per day and you have a position on that is $10,000, then the potential loss on the trade could be $100 per day if the market moves against you. However, this is just an estimate, and the actual loss could be much greater if the market moves significantly more than its historical average.



Another way to estimate the worst-case risk on a mean reversion trade is to use a risk management tool such as the value at risk (VaR) metric. VaR is a statistical measure that estimates the maximum loss that an investment is expected to incur over a given time period with a given level of confidence. For example, a VaR of $1,000 at a 95% confidence level would mean that there is a 5% probability that the loss on the trade will be greater than $1,000 over the given time period. This can help you to gauge the potential risk on a trade, although it is important to keep in mind that VaR is only an estimate and that actual losses can exceed the VaR estimate.



You can also use the Maximum Drawdown to measure the largest loss that a strategy has made over time. You can refer to Quantra's practice module on "Maximum Drawdown" to learn more.



You should also keep in mind that there is always a possibility of occurence of black swan events which could have a major negative impact on your strategy's performance.



Hope this helps.



Thanks,

Rushda