Changes to the Ra (Risk adjustment) graph

13 September 2019
The Market Owl

From now on the Ra (Risk adjustment) graph will show positions in the colour orange, in addition to the red and green which have been used up until now.

The aim of the Ra graph is to inform DARWIN manager and the investors of the amount and size of the adjustments which have been carried out by the risk manager.

It is important to remember that the leverage for the DARWIN position’s trades, whenever the risk manager doesn’t act, is always:

trader leverage * VaR (10%) / VaR trader (x%)

The manager can intervene for two reasons.

Positions in red

The positions in red are adjustments made by the manager because the trader has taken on more risk than usual compared with recent activity in the past.  As a consequence, the risk manager must intervene to avoid the DARWIN’s VaR going above 10%.  We consider these interventions to be the responsibility of the trader, and as such the Ra score is penalised, and in turn the D-Score.

Positions in orange

The manager can also intervene when the DARWIN leverage is excessive when using the previously mentioned formula, even when the global DARWIN risk for 1 month does not exceed a 10% VaR.

This happens when the underlying strategy always trades short term with relatively few trades a month.  In these instances, if there were no adjustment, the DARWIN could reach a leverage of over 30:1 in some cases.  This is dangerous for investors if in the time of the trade being open there is a very big movement on the underlyings (0.5% of movement on the underlying assets would result in a sudden loss of 15% on the DARWIN).

This is why there is a limit on the DARWIN leverage, meaning there are position which are closed without sticking to a target monthly VaR of 10%.

The leverage limits applied by Darwinex are the following:

  • For positions lasting less than 30 minutes, the maximum D-Leverage allowed will be 15.
  • If a position lasts between 30 and 60 minutes, the maximum D-Leverage that a DARWIN could open is 12.5.
  • Lastly, if the position lasts more than 60 minutes, the maximum D-Leverage would be 10.

These positions have always been adjusted, but they have never been shown on the Ra graph, creating confusion amongst our clients.

From now on, this will be shown in orange and will give an approximate indication of the adjustment carried out.  These adjustments, unlike the ‘red ones’, do not affect the score because we do not consider them to be a result of bad management by the trader.

Related article: What does the Risk Adjustment (Ra) attribute tell about a trading strategy / DARWIN?

Do you have any questions about the changes to the Ra graph? Do not hesitate to share them in the comments.