Position Sizing, Risk & Money Management Strategies For Futures Trading

smartcat

Active Member
#1
Trading in equity/commodity/currency can be supremely rewarding, if you have got your trading strategy right. Now let's say you are consistently making Rs. 10,000 profit per month using 1 Lot of Nifty, by day trading/swing trading/position trading.

What do you do next?

Start trading 2 lots? If yes, when do you scale up to 3 lots? After 1 month? or 2 months? If 2 months, why 2 months, and why not after 3 months?

When do you trade 10 lots? 100 lots? When do you stop? How does one increase the lot size in a logical way, without the risk of a blowup or a massive drawdown?

STEP 1:

First, calculate your overall networth. Your networth is the amount of money & asset you have, minus your liabilities. Example: You have a networth of Rs. 10 Lacs if you have the following -


Financial Assets:
Cash in savings account: Rs. 1,00,000
Fixed Deposits & Provident fund: Rs. 3,00,000
Stocks or Equity mutual funds: Rs. 2,00,000
Margin Cash with broker: Rs. 1,00,000

Total: Rs. 7,00,000

Physical Assets:
Car: Rs. 6,00,000 (Use carwale.com used car evaluation to check the approximate current value of your car)
Wife's Gold Jewellery: Rs. 2,00,000 (approximate weight in gms x 0.9 x Gold price per gram)

Total: Rs. 8,00,000

Financial Liabilities:
Car Loan Outstanding: Rs. 5,00,000

So your total networth is Financial assets + physical assets - financial liabilities = 7 Lacs + 8 Lacs - 5 Lacs = Rs. 10 Lacs.

Maintain an Excel sheet of your networth, and update the networth daily. Prices of your funds in equities changes everyday. Valuation of Gold you own (in jewellery form) changes everyday. You earn interest everyday. You spend money on something or the other everyday.

Basically, your networth changes everyday. And its important to track the changes using Excel. Use Moneycontrol.com's Portfolio for tracking your networth.

STEP 2:

Link your open Futures position to your Networth. That is, back your leveraged Futures positions with real assets (financial & physical). That way, you don't have leveraged positions at all - all your Futures positions are backed by real money. You are essentially taking zero leverage, while taking 90% leverage! Let me explain with an example -

Let's say you are trading in Nifty.

Nifty Spot value: 6000
Minimum Lot size: 50
1 Lot Nifty Future exposure value: 50 x 6000 = Rs. 300,000

Since you are linking your Futures positions with your networth (Rs. 10 Lacs), you can now trade in maximum of 3 Lots of Nifty (total exposure value: Rs. 9 Lacs), and perhaps trade in 2 Lots of USDINR (Exposure value = 2 x 60,000 = Rs. 1.2 Lacs)

If you have a networth of Rs. 3 Lacs, trade in 1 Lot of nifty
If you have a networth of Rs. 1 Lac, trade in 4 lots of GOLDGUINEA (worth 30k each) or 2 Lots of SILVERMIC (worth 50K each).

STEP 3:

Now increase or decrease your position size in futures based on your networth.

If your networth has become Rs. 12 Lacs because of trading profits/increase in share prices/salary income or bonus etc, add positions in futures equivalent to the gain (Rs. 2 Lacs). If your networth has become Rs. 9 Lacs because of trading losses/decrease in share prices etc, remove positions worth Rs. 1 Lac (USDINR contracts for example).

This way, you automatically increase your position size when you are doing well financially. And you automatically reduce your futures position size when you are not doing well.

By following this religiously, you adopt the money/risk management strategy that is recommended by all professional traders -> the anti-martingale strategy. You increase your position size when you are winning and you reduce your position size when you are losing.


Disadvantages:

1) Even if you are making trading profits, you might have to reduce your position sizing, especially since your networth consists of Gold/equities, that are volatile.

Solution: If you are making good profits in trading, get out of equities. Invest that money in safe debt Mutual fund or fixed deposit.

2) It's a very conservative strategy.

Solution: Take positions in futures worth X times your networth. If your networth is Rs. 3 Lacs, make it a rule to take positions worth 1.5 times your networth. This way, you will be able to take positions in futures worth Rs. 4.5 Lacs.

However, I wouldn't recommend the above. Because, soon greed will takeover and you might start taking futures positions worth 2x, 3x times your networth! :)

I'm personally following this strategy because I know I will never blowup my account. This is one of the strategies you can follow - if your intention is to trade for 10 years, 20 years or more.
 

gmt900

Well-Known Member
#2
Trading in equity/commodity/currency can be supremely rewarding, if you have got your trading strategy right. Now let's say you are consistently making Rs. 10,000 profit per month using 1 Lot of Nifty, by day trading/swing trading/position trading.

What do you do next?

Start trading 2 lots? If yes, when do you scale up to 3 lots? After 1 month? or 2 months? If 2 months, why 2 months, and why not after 3 months?

When do you trade 10 lots? 100 lots? When do you stop? How does one increase the lot size in a logical way, without the risk of a blowup or a massive drawdown?

STEP 1:

First, calculate your overall networth. Your networth is the amount of money & asset you have, minus your liabilities. Example: You have a networth of Rs. 10 Lacs if you have the following -


Financial Assets:
Cash in savings account: Rs. 1,00,000
Fixed Deposits & Provident fund: Rs. 3,00,000
Stocks or Equity mutual funds: Rs. 2,00,000
Margin Cash with broker: Rs. 1,00,000

Total: Rs. 7,00,000

Physical Assets:
Car: Rs. 6,00,000 (Use carwale.com used car evaluation to check the approximate current value of your car)
Wife's Gold Jewellery: Rs. 2,00,000 (approximate weight in gms x 0.9 x Gold price per gram)

Total: Rs. 8,00,000

Financial Liabilities:
Car Loan Outstanding: Rs. 5,00,000

So your total networth is Financial assets + physical assets - financial liabilities = 7 Lacs + 8 Lacs - 5 Lacs = Rs. 10 Lacs.

Maintain an Excel sheet of your networth, and update the networth daily. Prices of your funds in equities changes everyday. Valuation of Gold you own (in jewellery form) changes everyday. You earn interest everyday. You spend money on something or the other everyday.

Basically, your networth changes everyday. And its important to track the changes using Excel. Use Moneycontrol.com's Portfolio for tracking your networth.

STEP 2:

Link your open Futures position to your Networth. That is, back your leveraged Futures positions with real assets (financial & physical). That way, you don't have leveraged positions at all - all your Futures positions are backed by real money. You are essentially taking zero leverage, while taking 90% leverage! Let me explain with an example -

Let's say you are trading in Nifty.

Nifty Spot value: 6000
Minimum Lot size: 50
1 Lot Nifty Future exposure value: 50 x 6000 = Rs. 300,000

Since you are linking your Futures positions with your networth (Rs. 10 Lacs), you can now trade in maximum of 3 Lots of Nifty (total exposure value: Rs. 9 Lacs), and perhaps trade in 2 Lots of USDINR (Exposure value = 2 x 60,000 = Rs. 1.2 Lacs)

If you have a networth of Rs. 3 Lacs, trade in 1 Lot of nifty
If you have a networth of Rs. 1 Lac, trade in 4 lots of GOLDGUINEA (worth 30k each) or 2 Lots of SILVERMIC (worth 50K each).

STEP 3:

Now increase or decrease your position size in futures based on your networth.

If your networth has become Rs. 12 Lacs because of trading profits/increase in share prices/salary income or bonus etc, add positions in futures equivalent to the gain (Rs. 2 Lacs). If your networth has become Rs. 9 Lacs because of trading losses/decrease in share prices etc, remove positions worth Rs. 1 Lac (USDINR contracts for example).

This way, you automatically increase your position size when you are doing well financially. And you automatically reduce your futures position size when you are not doing well.

By following this religiously, you adopt the money/risk management strategy that is recommended by all professional traders -> the anti-martingale strategy. You increase your position size when you are winning and you reduce your position size when you are losing.


Disadvantages:

1) Even if you are making trading profits, you might have to reduce your position sizing, especially since your networth consists of Gold/equities, that are volatile.

Solution: If you are making good profits in trading, get out of equities. Invest that money in safe debt Mutual fund or fixed deposit.

2) It's a very conservative strategy.

Solution: Take positions in futures worth X times your networth. If your networth is Rs. 3 Lacs, make it a rule to take positions worth 1.5 times your networth. This way, you will be able to take positions in futures worth Rs. 4.5 Lacs.

However, I wouldn't recommend the above. Because, soon greed will takeover and you might start taking futures positions worth 2x, 3x times your networth! :)

I'm personally following this strategy because I know I will never blowup my account. This is one of the strategies you can follow - if your intention is to trade for 10 years, 20 years or more.
Someone who trades nifty futures can start with one lot and increase it by one lot whenever his profit exceeds 1.0 lac or corpus exceeds 1.0 lac. This will be a simpler way.
 

smartcat

Active Member
#3
Someone who trades nifty futures can start with one lot and increase it by one lot whenever his profit exceeds 1.0 lac or corpus exceeds 1.0 lac. This will be a simpler way.
It's simple yes. But The problem with this is that - it won't stand the test of time.

Examples:

1) Nifty could be at 10000 in 2014. The lot value is then Rs 5 Lacs. And if you take up 2 Lots just because you made a profit of Rs. 1 Lac, you are taking higher risk (with open futures position of Rs. 10 lacs). The risk in futures trading is during unforseen events, which strike rarely, but will strike!

2) NSE could increase/decrease lot size. Right now, its 50. But it could be 100 or 25 in the future.

3) Rs. 1 Lac might be a decent amount now, but not much 10 years from now.

When you fix a profit target achieved from trading for increasing position size, you will have to constantly make new decisions. When you have to constantly make new decisions, a new element of risk enters the picture (Eg: why Rs. 1 Lac profit? Why not Rs. 2 Lacs or why not Rs. 50000?). Based on your trading profit/loss, you stand the risk of increasing position size too quickly (or slowly).
 

SaravananKS

Well-Known Member
#5
For me this concept may suitable for investment.

when you trade on nifty (ie using leverage) it can not consider as investment

I would say the whole allocation for trading from your total net worth is risky
( one can decide the trading capital by the amount ready to loose!!!!!!!!)

once you decided the trading capital the old rule still works better

Never Risk more 2% from your trading capital in a single trade

:thumb:
 

smartcat

Active Member
#6
( one can decide the trading capital by the amount ready to loose!!!!!!!!)

once you decided the trading capital the old rule still works better

Never Risk more 2% from your trading capital in a single trade

:thumb:
For day traders, what you say makes more sense. You have a degree of control over your losses. If it gets past a particular level, you can get out of the position.

But for position/swing traders who have to hold overnight positions, they don't have the same luxury. There have been times, and there will be times in this future - when markets make large moves overnight. Stop losses won't work.

Your losses might be more than what you are willing to lose on a trade.
 

Cubt

Well-Known Member
#7
Very good thread to discuss about after all I strongly believe money/risk management is the holy grail which can turn a bad trader into a winner and winning trader into an expert trader.

Expecting more views from others. The rule I usually follow is max risk cap is my portfolio should not exceed 20% of my capital and single trade should not exceed 2% of my trading capital.

I check the possible max draw down in my system and have 2 times of that amount separately, so that even if I go bust I can still start all over again without reducing my position
 

smartcat

Active Member
#8
The rule I usually follow is max risk cap is my portfolio should not exceed 20% of my capital
I need to somehow incorporate a similar max risk into my risk management system. The loss percentage which will force me to stop trading for a few months, till things settle down. If I look at my trading system, certain events can wipe out a huge percentage of my capital -> Eg: Nifty limit down 10% one day, Nifty up 10% the very next day.

Yeah, I know - something like that has never happened. But those kind of unforseen events kill trading accounts.

I check the possible max draw down in my system and have 2 times of that amount separately, so that even if I go bust I can still start all over again without reducing my position
Are you hedging your futures positions, with options? Because, when you are trading futures, there is pretty much no limit on the drawdown (stoplosses won't work). Are you considering the price limits set by the exchange for calculating max drawdown?

By the way, if you are starting all over again after the max drawdown, you should probably wait for calmer markets. But if you want to get a piece of the action immediately, perhaps you should start over again with a lower position size?
 

Cubt

Well-Known Member
#9
Am a positional trader, and My maximum drawdown is 1000 points, which also considers 10% movement in nifty..so even if there is 10% movement, I can still manage that risk. And even i consistently lose 100 trades, still i can start again with same position size.

Am not hedging my position with options always as it limits my profits.
 

Cubt

Well-Known Member
#10
I find the maximum consistent drawdown that could happen, based on 6 years backtest results, its 1000 points. then I keep aside 50000 as my risk money and trade 1 lot. So I keep 75000 to trade 1 lot.

What if my consistent drawdown happened and am down 50000? I left with only 25000. In order to face this situation that may arise, I need to keep 1 lac for 1 lot, that is 1000*2*50. As my risk capital, so that even if I fail once I shall bounce back again and trade with the same quantity.

My calculated risk is 1.25 lacs for 1 lot of nifty, considering the fact I need to be in this business for next 6 years and even if I fail once in 6 years, I can still operate my business without any interruption as I have enough risk capital.
 

Similar threads

Broker Special Offers

Intraday Higher Leverage

Save up to 90% in brokerage and get higher leverage for intraday trades.

Name:Phone:
Email:City:
State:
Are you a day trader?