Risk & Money ManagementVaR
Value at Risk (VaR)
An estimate of the loss that will not be exceeded over a set horizon at a stated confidence level under normal conditions.
What Value at Risk (VaR) means
A Value at Risk figure is meaningless without three components: a time horizon, a confidence level and a currency amount. A statement such as a one-day 99 percent VaR of 850 dollars means that, on the assumptions used, losses over one day should exceed 850 dollars on about one day in a hundred. Three calculation methods dominate: historical simulation, which reuses actual past returns; the variance-covariance approach, which assumes a normal distribution; and Monte Carlo simulation, which generates synthetic return paths.
The measure is widely used by banks and prop desks because it aggregates diverse positions into one comparable number, and regulators have long embedded it in capital rules. Its central limitation is well known: VaR states a threshold but says nothing about how large losses become once that threshold is breached, which is exactly the region that destroys accounts. It also assumes the recent distribution of returns will persist, so it systematically understates risk during regime changes. Expected shortfall was developed to address the tail blind spot.
Worked example
If a 10,000 dollar account carries a one-day 99 percent VaR of 850 dollars, losses should exceed 850 dollars on roughly two or three trading days a year, and the measure gives no indication of how severe those days might be.
Related terms
- VolatilityThe magnitude of price fluctuation over a period, usually measured as the standard deviation of returns or as an average range.
- ExposureThe total market risk an account carries, measured by the aggregate notional value of its open positions.
- DrawdownThe decline from a peak in account equity to a subsequent trough, usually stated as a percentage of the peak.
- DiversificationSpreading capital across instruments or strategies whose returns are imperfectly correlated in order to lower portfolio risk.
- CorrelationA statistical measure between -1 and +1 describing how closely the returns of two instruments move together.
Frequently asked questions
What does Value at Risk (VaR) mean in forex trading?
An estimate of the loss that will not be exceeded over a set horizon at a stated confidence level under normal conditions.
How does Value at Risk (VaR) work in practice?
The measure is widely used by banks and prop desks because it aggregates diverse positions into one comparable number, and regulators have long embedded it in capital rules. Its central limitation is well known: VaR states a threshold but says nothing about how large losses become once that threshold is breached, which is exactly the region that destroys accounts. It also assumes the recent distribution of returns will persist, so it systematically understates risk during regime changes. Expected shortfall was developed to address the tail blind spot.
What is an example of Value at Risk (VaR)?
If a 10,000 dollar account carries a one-day 99 percent VaR of 850 dollars, losses should exceed 850 dollars on roughly two or three trading days a year, and the measure gives no indication of how severe those days might be.
Trade with a regulated broker
Understanding the terminology is the cheap part. The expensive part is choosing a counterparty whose execution, financing and withdrawal behaviour match what the marketing implies. Every broker below has been reviewed with a funded live account, and each review states which legal entity and which regulator applies to the account you would actually open.
Check the licence on the regulator's own register before you deposit — our regulators directory explains what each authority enforces, from leverage caps to compensation limits.