It is very important that you understand the amount of capital required to trade the markets. You want to have the ability to continue to trade the markets for the next year to twenty years without being wiped out. Most traders have no capital trading plan, use fear and greed to trade by, and over trade.
It’s no wonder that 90% of traders be it Forex/Equity/Commodity lose. Those 10 % that do make money, of course, are the ones that have learned how to trade. They make all the money that the others lose. If you make a plan of capital preservation, you will always have the necessary capital to trade with, even if you have the
expected losses in the markets. If you put all your capital at risk in the markets on a couple trades, like so many traders do, then you will surely lose it all and be out of the game. “Preservation of capital” is your first rule to apply with all your trades.
Let me give you an Idea on how we approach Risk Management in our trading.
National Stock Exchange , Nifty is the most traded instrument so I will take NIfty as an example. Nifty Lot size is 75 and trading near 10500.
Our Thumb Rule we follow is: You need 20% of the value of the total contract to safely trade the market, though the Your Brokers might charge between 5-10% margin depending on you trade Intraday or Positional.
If you fully leverage your position on the 5% margin, you will be scared out of the markets with fear and greed and will surely lose, so use the 20% margin rule to safeguard your capital.
If Nifty is trading at 10500, you would multiply this amount to Lot size which is 75 to get 787500 as the total value of the contract. 20% of the contract value is 157500.
Therefore to trade a 1 Lot of Nifty contract at 10500, you should have 157500 of capital. The Broker margin on a contract of wheat at that level is about 40-50 K. You therefore have an excess of almost 1 Lakh over the initial
Divide the 1 Lakh by 10 giving you a potential of 20 trades possible with a maximum loss of 5000 each before you’re out of the game.
Your average risk, should never be more than 5 % of the excess capital above the initial margin rate of the contract. You should have enough money to trade the market 20 times, and have 20 straight losses, before you would be wiped out. This should never happen, if you have a trading plan and trade according to the rules of successful trading, which you will learn in this course. It’s very rare that you would even have three consecutive losses, and even if you did, then the next trade could make you 10% on your money giving you a large gain over your small losses. Your capital for trading markets should be at least 20% of the total contract value.
You should never risk more than 5 % of your excess margin money on any one trade, so you can trade at least
10-20 times before you are out of the game. If the market is in a major uptrend, as the market gets higher, you will need more capital to trade. If wheat rises to $4.50 per bushel, you will need $4500 to trade each contract and you would never risk more than 10% of your excess margin capital on each trade, so you could have 10 losing trades before you were out of the market.