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 youíre using a stop loss? Wonít the stop loss limit be your maximum drawdown anyway with a little slippage?
I suppose Iím 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 donít 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.