Most professional traders trade one lot of Nifty Future for every 1.5 Lakh in their trading account.
Most of Retail Traders trade one lot of Nifty Future for every 50K-60K in their trading account
90% of Retail trader blow their account in less than 1 year. One of the main reason for losing money is Leverage.
Most of Brokers in India will allow you to open account and trade Futures and Options with just 20-30K capital also. They give leverage of more than 10-20 times and Retail traders feel happy to carry such big position and make money. But when the market turns opens gap down like it did today most of traders blow their account as they do not get chance to exit also.
The number one reason new traders fail is because they are under capitalized from the start and don’t understand how leverage really works.
What is Leverage?
Leverage is the ability to make big trades with only a small amount of actual capital in your account. Most of brokers offer leverage as more you trader more they will make money. Most traders do not have big capital to start trading and they use leverage to take trades without understanding how it works and blow off their account.
How Can Leverage Hurt You?
Leverage can be a sharp double-edged sword. It can work for you, or against you. Your Broker allows you to Buy 5 Lots of NF on 1 lakh capital and suppose you make 50 points in that trade so your profit will be 37.5 K (5*100*75 ). So on a capital of 1 lakh you made 37% return in single trade.While it is really nice to think about the money you can make, the money that can be lost is rarely discussed. Leverage can be very dangerous if used improperly.
Taking the above example Suppose trader is carrying 5 lot of NF and market open 150 points down as it happened today trader will lose almost 56K which is more than 50% of his trading capital. Leverage is layman terms is Like Try to Drive a BMW when you do not know how to drive MARUTI
When Traders trade too big, he get headaches from not being able to take my eyes off the chart from one tick to the next in case there’s a sudden massive spike, and there’s nothing worse than wiping out you’re whole Week’s profit, in 1 bad trade.
As a trader Ideal thing to do is Learn trading strategy, back test it, Master it trade small, make consistently good profits week after week. Slowly increase leverage as you grown your trading account.A good time to use leverage is when adding to a winning trade. If you have a trade that has progressed favorably and you want to add to it, this is a good use of leverage. This is called leveraging your profits.
My conclusion is, sort out you’re leverage, let you’re trades breathe and the profits will come.