How to manage the risk of a trading basket

Key figures

• Equity = balance + floating result of open positions.
• Floating loss — the basket's unrealised loss right now.
• Equity drawdown — the fall of equity from its previous peak, in percent.
• Margin Level = Equity / used margin × 100%. At the Margin Call level the broker warns; at Stop Out it starts closing positions.
• Exposure — the basket's total volume in lots and in currency; it grows with every level.

Example (illustration)

A $10,000 account, $2,000 used margin, a −$6,000 floating loss. Equity = $4,000, Margin Level = 4,000 / 2,000 = 200%. With a 50% broker Stop Out, forced closure starts when equity falls to $1,000 at the same margin.

Limits to set in advance

• A maximum equity drawdown after which the basket is force-closed.
• A maximum basket volume and number of levels.
• A minimum Margin Level buffer below which no new positions open.
• A cap on the number of instruments traded at once (pair correlation adds risk).

Why a limit beats hope

Without a preset limit the closing decision is taken by the broker at Stop Out — at the worst moment and the worst price. A limit locks the loss in earlier and keeps capital for the next cycles.