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The problem with equalising VAR

As an Investor I have a hard time with this one.

I will not give any particular Darwins as examples as this may be seen as unfair to
the Traders’ providing them, however examples are easily found.

I find a strategy of interest which I look at in detail.

The Trader in question has very consistent risk management
and good returns.

He/ she trades conservatively with a (relatively) low VAR
of, for example, between 5 and 10.

I now look with great expectation to the associated Darwin.

I find the Darwin has hugely more volatility than the
underlying strategy as it is adjusting the trades to give a VAR of around 20
therefore magnifying the volatility by a factor of around 4.

Therefore a conservative trading strategy has been turned
into a completely different animal.

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Can I propose to move this topic to feedback and suggestions or Darwinex Algos?

Huge problem @SATFX

To me, Limiting VaR to 20% is great to be “safe” from crazy traders, but as you signal, it is completely different when we speak about strategies with low VaR.

Mine, RWU, with a VaR around 10%, has higher volatility than the one I would like and it is just multiplying x2. I don’t want to think about x4 or x8 as there are some in Darwinex.

Besides, I think it is a vicious circle… Since serious traders are usually more concern about Darwin returns rather than strategy returns, they keep decreasing position sizing to control the loss into the darwin, and as a consequence, Var keeps going down and Darwin multiplies more and more strategy results.

There are Darwins with 0,5% VaR with a x20 ratio!

Simply Dangerous!!

I hope Darwinex can “fix” this problem with the new adjustment in Risk Manager, but anyway, It is a good debate to consider if it is better to quote every Darwin with a 20% VaR, or just limiting VaR to 20% and allows lower ones.

Good point @SATFX

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Completely agree, your Darwin is a good example.

It seems that the system misrepresents good careful Traders and allows really bad ones to get away with murder!

Your suggestion of limiting maximum risk but not increasing lower risk strategies is a good one.

I would like to invest in you as a Trader because of your underlying strategy, but will not because the only way I can is to purchase your Darwin, which as I said previously is a very different product :frowning:

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You are right @SATFX, but the argument defended by Colon brothers is the following:

If you would like to invest 100 in a Strategy with a Var 10%, you can invest 50 in his Darwin with Var 20%.

If you think about it, it really makes sense.

As long as VaR is stable, that could work perfectly.

Thanks a lot for raising this topic, @SATFX!

There are several reasons why DARWINS are listed at the same risk level.

To begin with, the fact that DARWINS’ risk is normalised makes them apples-to-apples comparable with each other. Investors can compare returns and drawdowns between different DARWINS at a glance, which comes in handy when you have to pick among almost a 1000 strategies!

Secondly, normalised VaR allows investors to know in advance how much they stand to lose: if you are willing to risk 100 GBP in the worst month, you know you should not allocate more than 500 GBP to a given DARWIN at a 20% VaR. With a 10% VaR, you’d need to invest a 1000… in a way, a higher VaR allows you to diversify your portfolio with a smaller amount.

Thirdly, and more important, please note that we are the asset manager who needs to take care of the investor, so we need to be in full control of risk exposure. Most of the traders are not regulated as asset managers, so there would be legal issues in allowing people to replicate their decisions without them being regulated. The way we built it, we as asset managers are the ones in charge of protecting investors from sudden changes by the traders.

Let me use ERQ as an example. The underlying strategy trades roughly at a 0.25% monthly VaR… He’s trading very well. Let’s imagine Investors like his low-risk trading style and invest 100,000 in him. The returns are fairly good (0.8 % in a year with a risk close to zero…). Following your suggestion, our risk manager is not intervening because the trader is trading below 20%.

Now, imagine the trader all of a sudden starts trading at a 19% VaR and markets turn against him. As per your suggestion, we are not intervening. Investors were replicating a strategy they expected to trade at a 0.25% VaR and all of a sudden they have lost in one single day 10 times what they earned during the last year!

Believe it or not, there are bunch of quite clever people working here and we have invested a lot of time (and money) to find the best solution. This does of course not mean that we are right… but you can trust we have found several cases where things could have gone very wrong if our algos hadn’t intervened!

There are several features in the pipeline that would not be possible in case of non-normalised DARWINS (backtests, filters, etc.). All in all, we deem the reasons to have normalised DARWINS outweigh the cases where conservative strategies are turned into a completely different animal. BTW, there are also several cases where “aggressive strategies” are turned into smooth DARWINS :wink:

That being said, please note that we have been working on a major improvement to our risk manager for a couple of months now: the way it is currently set up, it is being too conservative when replicating some types of strategies. This is a crucial change that can only be implemented when we are 100% sure it will work like a swiss clock. Please be patient!

Looking fwd to hearing your thoughts!

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Excellent topic. Maybe this highlights the need for a two prong approach:

  1. Cap the VaR at 20% for the reasons/logic mentioned above;
  2. Have a self-referential component where the Var (say X) of a particular DARWIN is bounded within +/- Y of X.
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Very good and important point. However I thought the algos would intervene automatically if a trader suddenly changed their risk in that way, not just intervene if 20% VAR was exceeded but also if the risk suddenly increased. Perhaps I am mistaken on that point.

Yes, I believe that 100% and very much appreciate what you are doing.

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Really enjoying this topic so far. Thanks @SATFX for raising those interesting questions, @Yofxtrader for sharing your particular experience, and @ignacio for providing your comprehensive answers.

On your last point @SATFX, my understanding is that if VaR was only capped at 20%, the risk manager would not intervene on changes to VaR of the underlying strategy below that threshold, therefore leaving investors badly exposed to those arbitrary changes by the trader.

I like the ‘trick’ suggested for investors who would like to invest in a strategy with a low VaR but not in the DARWIN with VaR at 20% (h/t @Yofxtrader) : Think about how much you would invest in the strategy and then scale your investment in the DARWIN by the factor VaR Strat / VaR DARWIN.

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For me th Var is one of the most important problemes for darwinex.

I understand very well they have to protect the investors but is far to be clear for me the necessity to boost the darwin.

This create a distortion between strategy and darwin that is not benefique and make confusions in many levels.

I hope in the future darwinex is going to change that.

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Source : Darwinex Blog, August 17

  1. VaR Simulations
    We are working hard to introduce a major improvement in the way our risk manager replicates trading strategies on behalf of investors. The first step towards that goal has been introduced this week: VaR simulations have been improved significantly. The way we were simulating VaR in the past used to have an effect on the D-Periods’ calculation. This used to cause a delay in the accounts’ analysis that has now been fixed. VaR simulations are now independent from D-Periods, which makes it easier (and faster!) for our algorithms to analyse trading strategies.

According to my observations, it is since this change that the risk manager corrects Monthy VaR in a Time Frame in my opinion much too short.

The old version was observing à welcome latency before correcting the Monthly VaR. Now it becomes impossible to apply a Money Management involving different lots. This is the major reason why we have gone from a risk limiter to a risk enhancer.

In my view, it is necessary to increase the Time Frame of the analysis of the Risk Manager.

This feeling of being followed closely by a PitBull is painful !

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We must not forget that the risk manager does not just change the Monthly VAR.

If an abnormal increase of risk, it regulates the exposure immediately. You know, the famous purple dots…

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I like the idea that the VAR is constant but I still have issues with complete understanding.
For example:
My risk per trade is 0.3% + slippage, stop loss is always in place, but my stop-loss varies so position size varies too (reminder the risk % is the same) I also use limited max. leverage per open trade in a case of stop-loss being close to entry point.
-How does algorithm see the setting? Does it calculate Darwins position size based on stop-loss?
-Will loss on Darwin be greater if stop-loss on trading account is set further away?
I would like to have some control over drawdowns on my Darwin aswell.
As many have mentioned before, Darwins have quite high risk and quite big % moves.

-What about traders who dont use stop-loss, or they forget to place it. Does algo has any solutions for that? If not, with VAR 20% and no stop-loss I can expect some big drawdowns.

I don’t think you have to see like this.

Darwinex don’t know if traders have stops and where they are so this is the reason I think they have created the Var 20.

Thank you. I haven’t seen that.

So positions size at Darwin is always the same no matter where stop-loss is?

Sorry but I can’t halp you much.

What I said are just observations that have to be confirmed by specialists.

The darwinex atributs are complexe.

@Livenemaxx I think that you got that wrong. @ignacio was illustrating the case of an alternative setup for the risk manager that would cap VaR at 20% but do nothing while it was below that threshold, as suggested I think by @Yofxtrader. He went on to show such a design could have negative consequences for investors.

If my understanding is correct (please someone confirm this), the risk manager, as it is currently designed, is constantly acting to make sure that the underlying risk of the DARWIN is as close as possible to its target of 20% monthly VAR.

I want to mention here a symbolique case of darwin.

The darwin MNG.

Lokk at the picture and I wont someone of darinex staf to explain me how theirs algos can transform a loosing month in an excellent month.

Dispite that the management and performance note too .

Honestly I don’t find the words to qualify this.

My view is that algos where kicking in when the trader with extreme trading style managed to trade even more extreme and crossed the “usual trading style”, like maybe with more open trades and/or higher position size per open trade.

Looks like algos did job perfectly.

Oh, and if you see Darwin Risk Adjustment, there is plenty of trades adjusted in September.

@DAIICHI You are more than welcome to request a Skype session with one of our experts to look into your strategy (and to discuss this specific question).

If possible, it’d be good if you could watch this webinar to gain a deeper insight into how DARWINS work: https://www.youtube.com/watch?v=IJFSGIaa44Q

Once you have watched the webinar, I’d encourage you to request a Skype session through your dashboard (see below):

Thanks

but I’ve already watched the webinars.

And I’m not sure my english is so good to make a skype with a specialist.

Even if it I don’t think I will ever understand the logic behind your algo.