Risk Management on Calls

This post is on risk management and management of the trading capital wisely.

At Vtrender, we have always believed that whilst a good analysis of the charts will give you good entries and exits, without a consistent money management tool you may not be able to keep most of the profits made. 

In fact, it happens with most traders, initially, when they start that they hit a purple patch with a few good trades early on but one bad trade comes along which wipes off all the gains leaving you back on square 1 and sometimes with a reduced capital also.

The market opens everyday and an opportunity to trade on a good setup is always around the corner, but if you don’t treat your account well and wisely, you may not be around to trade for a long time even if you are extremely adept at reading charts and picking up trades.

Here’s what I have learn’t and followed over the years and hopefully it will help you as well.

 

For starters, you have to have a minimum of 2 accounts. You have to keep separate accounts for cash holdings, positional futures and intra-day trading. You can pledge your shares and avail margin for positional futures trading with some cash kept aside for MTM needs but point is, you need to trade your positional and intra trades in 2 different accounts.

For positional trades keep a risk of 3% on every trade. I maintain a fixed 3% on the Nifty and 2% on the Bank Nifty as a one -off exception. All Stock futures should be done with not more than 3% of risk. If you hit 3 trades in a row position ally which are wrong and cross 9% of the account , then you stop trading that month and review your charts and bias again. 

 

For Intra day trading never keep a SL in the system between 10.15 am and 2 pm. This is the time where the markets are mostly rotational or run by locals with thin volumes. A stop in the system is easily picked up and noted and most of them get taken by the market in this period. It is always better to place an alert via an sms or an email from the trade platform than run a risk of stop run between 10.15 am and 2 pm. ( This does not apply to news based days like RBI meets etc) 

What is this 3% and how does it work?

It’s 3% of the total capital you trade with.

Let’s assume your trading capital is 10,00,000/-,  then 3% of that is 30,000/-. This means that on every trade you take you should not lose more than 30,000/- in that trade in the worst case scenario. For three lakhs it would be 9000/-.

How to apply this practically?

Let’s assume there is  a Sell side View in Nifty at 11000  with a Stop Loss of 11100 or a risk of 100 points. 

And let’s also assume that you are trading with a capital of INR 10,00,000/-

So with the 3% risk rule on capital, you have predetermined, that you would lose not more that  30,000/- on the trade regardless of what the outcome is. Now the next step. 

You will not take this trade with not more than 4 lots for your account size.

How do I arrive at that number?

The formula for a quick calculation is {(3% of account size/ Stop Loss)/ lot size } 

So {(3% of 10,00,000 /100)/ 75}= 4 lots 

If there is  a sell call in Nifty with only 50% size it means a risk of 1.5% of 10Lakhs for that Stop Loss or 15000/- which would be 2 Lots only.

 

For the Option Buys again we are not willing to lose more than 3% on the trade or 30,000. So if a Nifty Option is given with a SL of 30 points you will go with 12 lots {(Risk capital/ Stop Loss)/ lot size }.

 

For Option writing again it is a max of 3% risk. So depending on the stop given position size again. For example, we just wrote a call at 70 with SL of 99 for a risk of 29 points. So on 3% of capital the proper trade size was 12 lots again.

 

It’s a good old 3% rule at work in every position. It will ensure that your capital is preserved on trades gone bad.

Intra day Trades

As a rule of thumb, most intra-day traders will risk only 1% of their trading account on every trade.

So assuming you have a 10L account to trade intra-day a 1% risk on an intra-day Nifty call is 4lots for a SL of 35 points and for a SL of 70 points it is 2 lot only. Conversely, a SL of 17 points can give you 8 lots to trade with.

It is the same rules as the Positional SetUp but instead of risking 3% we are putting only 1% of the account at stake in every intra day call.

 

So you see it is not in the SL of the trade, but the amount of money you are willing to risk on the trade. 

Capital is first, trade opportunity comes second.

If you preserve your capital, you will get enough opportunity but without the trading capital , there is no use of the opportunity.

 

Get rich slowly.

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