Equity based daily loss and the floating spread trap around news

[Fairman]

Equity based daily loss and the floating spread trap around news

if your firm measures the daily loss limit using equity, then your floating profit and loss count, not just closed trades. That makes some situations riskier than they look.

Here's the trap I came across. I had a trade open in profit with a stop in place and a news release was a couple of minutes away. I thought I was safe because the stop was at breakeven. But at the release the spread widened a lot, the floating P&L on the screen swung, and for a few moments my equity was well below where it had been. It didn't hit the limit, but it was closer than I'd expected.

Spreads widen on all open trades, including ones that are in profit. The equity calculation uses the bid or ask depending on the direction, so a wide spread can reduce your equity instantly even if the mid price doesn't move.

So my rule is the same as with the news restrictions: be flat before the release. And I keep a buffer between my daily stop and the firm's limit, so a spread spike can't turn a normal day into a breach.

[Fairman]

The gap I leave below the firm limit is something I set at the start of every evaluation. If the firm allows a five percent daily loss, I stop at around three. That leaves room for things like spread spikes, slippage on a stop or a trade that gaps a little. Treating the firm limit as the real floor means one bad fill can end the account. Treating my own number as the floor gives me a safety margin I never have to think about.

[Fairman]

Also worth knowing how your firm calculates the starting point for the daily loss. Some use the balance at the start of the day, some use the higher of balance or equity at the reset time. If you are holding a trade in profit at the reset, the starting point might be higher than you think, which makes the daily limit tighter. I check this in the rules before the first trade and write the exact method on a sticky note.