Forex glossary
Portfolio Risk
Portfolio risk concerns the combined result of all exposures, including sizes, directions and relationships between instruments. Adding planned stop losses gives a scenario, not a guaranteed loss bound. Shared currency factors, gaps and changing correlations can hurt several positions simultaneously.
Illustrative example
How does it work in practice?
A hypothetical portfolio has three positions, each with a planned 100 PLN stop loss. Their scenario total is 300 PLN; a common price gap and worse fills can produce a larger loss.
A case to work through
Two different budgets
Model: equity is 12,000 USD; positions have planned losses of 120 and 180 USD.
- The scenario total is 300 USD.
- 300/12,000 = 2.5% of equity, even though the first position budgets 1%.
What follows? Assess the combined plan before adding a position.
Example boundary: This addition model excludes correlation, gaps and slippage.
Adding scenario budgets
Text description of the diagram
- First position: Planned loss 120 USD.
- Second position: Planned loss 180 USD.
- Combined: 300/12,000 = 2.5% of equity.
A useful distinction
Portfolio Risk / 1% Rule
The 1% rule can apply to one trade; portfolio risk concerns the combined exposures.
Change an assumption, see the result
What changes if…?
Add two loss budgets and compare them with equity; this models neither dependence nor maximum loss.
We add two planned losses in the same currency. This is not a correlation model, VaR or a maximum portfolio loss. Costs, gaps and changing relationships between positions may increase the actual loss.
Check your understanding
Express the combined loss budget as a percentage of equity.
Show the answer and explanation
3%
(80 + 160)/8,000 = 3%.
From position budgets to portfolios
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Related terms
Sources and documentation
- BIS MAR10: market risk terminology
VaR at a stated horizon/confidence and expected shortfall as a tail mean.
Document read: - MetaTrader 5: basic trading principles
Orders, deals and positions; FOK, IOC and partial-filling policies.
Document read:
The example illustrates the mechanism. Check current account conditions and instrument specifications with the provider.