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.

[Shadow Trader]

The reset method in the third post can tighten the day far more than it sounds. Numbers help, because the trade does not even have to lose for the room to shrink.

img_13545_r1.png (78.03 KiB) Viewed 12 times

The chart uses a made up 100,000 account with a 5,000 daily limit: a trade floating 1,500 in profit at the reset makes the day start at 101,500, so the floor moves up to 96,500, and if that trade drifts back to breakeven 30 percent of the room is gone with no closed loss. Nothing on the trade history would show it.

Stack the spread spike from the first post on top and it gets tighter again. Say the position is 3 lots of EURUSD and the spread opens from 0.3 to 8 pips at the release, that is about 230 dollars of equity gone in a second.

This is where a personal buffer taken from the reset value rather than the balance helps. Three percent off 101,500 puts the personal stop at 98,455, which still sits 1,955 above the firm floor even after the spike.

Closing anything in profit before the reset seems the simplest answer. Does anyone here know firms that show the recorded starting equity on the dashboard, so it is not guesswork?

[Shadow Trader]

Two smaller items hit equity at almost the same moment as the reset, and they rarely get mentioned. Swap is charged at rollover, and on most platforms Wednesday night carries three days of it to cover the weekend.

Say 3 lots are held overnight on a pair where the swap runs at minus 9 dollars a lot per night, then Wednesday takes about 81 dollars from equity in one go. On a firm that resets at the same hour, that charge can land just before or just after the snapshot, and it is worth knowing which.

Commission behaves similarly on accounts that charge it at the open. At 7 dollars a lot round turn, opening 3 lots shows 21 dollars of loss in equity the moment the trade is placed, before the spread is even counted.

None of these figures is large alone. The issue is that they stack on a day already close to the limit, and a personal stop at 3 percent that only counts closed trades can still drift past it once equity is what matters.

Does anyone here know whether firms count swap toward the day it is charged or the day the trade closes? Rule pages are rarely clear about it.

[FXS Prop Desk]

A trade in profit with a stop in place can still breach an equity-based limit if the spread widens enough during news, because the floating loss on other positions is counted at the worse price.

Some traders close all positions a few minutes before major releases on equity-based accounts for exactly this reason. It feels like giving up a winning trade, but the risk of breaching the limit on a spread spike is not worth it. Knowing exactly how the firm calculates equity is essential here.