Value At Risk

2023년 8월 18일

The Value at Risk Channel (VaR Channel) is a trading indicator designed to assist traders in managing their risk exposure effectively. By allowing users to select a specific time period and a probability value, this indicator generates upper and lower limits that the price might potentially attain within the chosen timeframe and probability range.

CONCEPTS

This indicator employs the concept of Value at Risk (VaR) calculation, a crucial metric in risk management. VaR quantifies the potential financial loss within a position, portfolio, or company over a defined time period. Financial institutions like banks and investment firms use VaR to estimate the extent and likelihood of potential losses in their portfolios.

The "historical method" is utilized to compute VaR within the indicator. This method analyzes the historical performance of returns and constructs a histogram representing the statistical distribution of past returns. Assuming returns adhere to a normal distribution, probabilities are assigned to different return values based on their position in the distribution percentile.

HOW TO USE

Suppose you wish to plot upper and lower price limits for a 4-hour period with a 5% probability. Access the indicator's Settings tab and set the Timeframe parameter to "4 hours" while configuring the Probability parameter to 5.0.

The indicator serves as a tool to determine appropriate Stop-Loss levels triggering with low probability. Additionally, it helps gauge the likelihood of triggering such levels.

Likewise, you can assess the probability of your desired Take-Profit level being reached within a specified time frame. For instance, if you anticipate your target to be achieved within a week, set the Timeframe parameter to "1 week" and adjust the Probability parameter to align the VaR channel's limits with your Take-Profit level. The resulting Probability parameter value reflects the likelihood of your target being met within the expected time frame.

This indicator proves valuable for evaluating and managing risk, as well as refining trading strategies. If you discover other applications for this indicator, feel free to share them in the comments!

SETTINGS

Timeframe: Designates the time period within which the price might touch the VaR channel's upper or lower boundary, considering the specified Probability parameter.

Probability: Defines the likelihood of the price reaching the VaR channel's upper or lower limit during the timeframe determined by the Timeframe parameter.

Window: Establishes the historical period (number of past bars) utilized for VaR calculation.