The money management or position sizing is supposed to determine the success after a trader has discovered a profitable trading system. Many traders with small capital lose money because in the eyes of those who are aware about MM, the losing traders are taking too big a position.
The margin requirement for one lot of Nifty is 25000/- and for one lot of Bank Nifty is around 50000/-. This is just the margin requirement by the broker. If the capital available is one lakh, most people tend to trade at least two lots of Nifty or one lot of Bank Nifty assuming that they have adequate margins. (The belief that they are using only half their trading capital).
The classical text book approach says we should not risk more than 2% of capital on a single trade. That means you will take a risk of Rs. 2000/- on a trade. Now suppose the stops are at a distance of 100 points on both Nifty and bank Nifty, what is the appropriate position size?
We divide the risk amount by the stoploss to determine the position size. For the Nifty it works out to 20 units. This implies that with a capital of one lakh at our disposal, if the stops for the trade is 100 points away, we should trade in just one lot of Mini Nifty and keep far away from Bank Nifty. Calculating in the opposite way if the Stoploss is 100 points away you need a capital of 250000 (Two lakh fifty thousand only) to trade in one lot of Nifty(lot size 50) or Bank Nifty(lot size 50). The price of the instrument being traded comes no where into the picture. (This comes as revelation). Whether Nifty is at 2500 or 5000, if the SL is 100, position size is 1 lot for a capital of 250000/-
Is this the real reason for the failure of traders who trade with small capital?? I am sure many would think One lakh is a good capital to start trading the Nifty and the Bank Nifty but the text book points elsewhere.
Do you determine your position size in the classical fashion before entering every trade? Have you been able to manage your risks better by following the classical approach?
The margin requirement for one lot of Nifty is 25000/- and for one lot of Bank Nifty is around 50000/-. This is just the margin requirement by the broker. If the capital available is one lakh, most people tend to trade at least two lots of Nifty or one lot of Bank Nifty assuming that they have adequate margins. (The belief that they are using only half their trading capital).
The classical text book approach says we should not risk more than 2% of capital on a single trade. That means you will take a risk of Rs. 2000/- on a trade. Now suppose the stops are at a distance of 100 points on both Nifty and bank Nifty, what is the appropriate position size?
We divide the risk amount by the stoploss to determine the position size. For the Nifty it works out to 20 units. This implies that with a capital of one lakh at our disposal, if the stops for the trade is 100 points away, we should trade in just one lot of Mini Nifty and keep far away from Bank Nifty. Calculating in the opposite way if the Stoploss is 100 points away you need a capital of 250000 (Two lakh fifty thousand only) to trade in one lot of Nifty(lot size 50) or Bank Nifty(lot size 50). The price of the instrument being traded comes no where into the picture. (This comes as revelation). Whether Nifty is at 2500 or 5000, if the SL is 100, position size is 1 lot for a capital of 250000/-
Is this the real reason for the failure of traders who trade with small capital?? I am sure many would think One lakh is a good capital to start trading the Nifty and the Bank Nifty but the text book points elsewhere.
Do you determine your position size in the classical fashion before entering every trade? Have you been able to manage your risks better by following the classical approach?
