# VaR - Value at Risk (Risk Management)



## quinn123 (31 December 2009)

Hey,

I was wondering if anyone here uses Value at risk (*VaR*) to help manage their trading portfolio?  I have a VaR calculation which incorporates liquidity, expected rate of return and volatility of a share (*LVaR* - Liquidity Value at Risk) so I can calculate the maximum expected drawdown and ensure it is in-line with my capital at risk per share (how much of my portfolios capital I'm willing to lose to a single share).  Is it possible to incorporate a *stop-loss limit*, *traded volume* (Activity), *share direction* (trend) & a shares *market cap* into a VaR calculation?

Is value at risk actually necessary if you’re using a stop loss?  Won’t the stop loss limit be your maximum drawdown anyway with a little slippage?

I suppose I’m really just looking for a risk management strategy which incorporates a shares liquidity (Depth), traded volume (Activity), volatility, direction (trend) & market cap.  I want to basically ensure the share is suited to my *risk profile*.  Maybe you could use some empirical rules such as don’t buy a share with low volume and in a down trend.  Although it would be nice to plug all these risk parameters into a VaR calculation and have it spit out a projected maximum loss to see if you should pull the trigger or not. 

Cheers.

Michael


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## mazzatelli (31 December 2009)

I use VaR to keep an eye on risk at 2 & 3 sigmas for options portfolio.

imo, it should be used in conjunction with other risk metrics and rules of thumb [e.g. Greeks] rather than trying to incorporate everything.


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## quinn123 (31 December 2009)

Thanks mate, I think I will just have to apply some rules of thumb as you suggested.  

Is it possible to calculate the average *liquidity* of a share?  I'm going to use the *bid-offer spread* as a measure of liquidity, but I only know how to get the current measurement which isn't very practical for future predictions.  Is there any *indicator* (in incredible charts) that will tell me the *average liquidity* of a share over a certain *historical time period*?

Thanks!


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## quinn123 (1 January 2010)

I found that I can get a shares liquidity through commsec... Sweet!


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## skyQuake (1 January 2010)

quinn123 said:


> Thanks mate, I think I will just have to apply some rules of thumb as you suggested.
> 
> Is it possible to calculate the average *liquidity* of a share?  I'm going to use the *bid-offer spread* as a measure of liquidity, but I only know how to get the current measurement which isn't very practical for future predictions.  Is there any *indicator* (in incredible charts) that will tell me the *average liquidity* of a share over a certain *historical time period*?
> 
> Thanks!




Just use average volume?
Bid/ask can be deceptive; EoD bid/asks are more often than not completely incorrect.


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## quinn123 (2 January 2010)

I'm treating the average daily traded volume and liquidity as two different things with my risk management.  

Liquidity - I'm using _bid-ask spread_.  So it is the hypothetical loss I would incur if I bought and sold the share straight away. So EOD bid-ask are usually incorrect? I suppose I will just have to accept that, thanks for the info.

Trading volume - I'm using the _5% rule_.  I won't trade more than 5% of the average daily traded volume of a share.

What are some other rules of thumb?


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