Stress-testing a ladder before you run it

Define the adverse move you are testing

A stress test asks what happens if price moves a set distance against the basket and stays there. Choose a distance that is realistic for the pair: for example, the largest move in the past year, or a multiple of the average daily range. Then work out which rungs would be filled at that distance and what the basket would cost.

A worked example

Take a short NZD/CAD ladder that opens rung 1 at 0.8200, spaces rungs 45 pips apart, adds 0.20 lots every two rungs and stops at eight rungs. The rung prices are 0.8200, 0.8245, 0.8290, 0.8335, 0.8380, 0.8425, 0.8470 and 0.8515. The lots are 0.20, 0.20, 0.40, 0.40, 0.60, 0.60, 0.80 and 0.80, a total of 4.0 lots. If price reaches 0.8515, every rung is open and the average entry sits well above rung 1.

Multiply the position by the pip value and the distance from each average to the stress price to see the floating loss at each depth. Then check the margin: the required margin grows with total lots, so a deep ladder can use a large share of the account even before any loss.

Margin level and the planner

Margin level is equity divided by used margin, expressed as a percentage. If floating losses shrink equity while margin rises, the margin level falls. The planner in the PipLadder calculator performs this stress test: it works out the loss and margin at the stress distance for your portfolio, leverage and risk profile, and limits the number of rungs so the result stays within the drawdown ceiling you chose. Run the calculator before you subscribe and test a deeper distance than you expect.

Key takeaways

• Choose a realistic adverse distance and see every rung it fills.
• Total lots, margin and floating loss all grow with depth.
• Use the calculator's stress test and assume the move can go further.