Nearly all the traders have one major issue... They have all lost lots of money. Why does this happen? Because traders jump into the ring, without any preparation or plans.
What are your risking normally - its your hard earned capital. If you trade without any basic money management or risk management plan, you will surely lose all your capital.
Here is a framework to set things in order, which can save you a lot of tension, emotional drainage and fear of the market.
Fundamental -
DO NOT TRADE IF YOU DONT HAVE FOLLOWING TWO POINTS MANAGED:
1. A trading system (even if these are tips) which doesnt generate better than 60% winning trades.(and you will see why shortly).
2. You dont have a written money management plan, which you use, everyday.
Here is an example of the factors involved in money management. If you have a capital of 100000, decide how much you can risk to lose in a day,week and a month.
Example, we say 0.5%-2% per day. This translates upto 40% per month, which is unacceptable, so you have a weekly and monthly cap as well.
Say 5% for the week
and 10% for the month.
Example, we say 0.5%-2% per day. This translates upto 40% per month, which is unacceptable, so you have a weekly and monthly cap as well.
Say 5% for the week
and 10% for the month.
So to avoid our capital disappearing into smoke, the first rules for trading that evolve are:
If any day our loss exceeds 2%, (Rs 2000) stop we trading for the rest of the day.
Any week, our loss exceeds 5% (Rs 5000) cumulative, stop trading for the rest of the week.
Any month, your loss exceeds 10%, (Rs 10000) stop trading further.
At each of the stops, incase these are hit, we should review the trading methodology.
Unless our trading system delivers 60-70% winning trades on a consistent basis, first on paper trades and then in the real trading environment, we dont trade again. Money that you dont trade is money saved.
So on every day/week and month, use the win %age and the loss amounts as barriers for any further trades. And if you dont cross them, step back, review and fix the basic issues. If you do cross, the barriers, you are cruising to success.
So on every day/week and month, use the win %age and the loss amounts as barriers for any further trades. And if you dont cross them, step back, review and fix the basic issues. If you do cross, the barriers, you are cruising to success.
If the win trade ratio of your trading system is not >60% the absolute minimum, then your trading method is faulty and you are gambling. Review the method and fix it first, as suggested above.
Now, a little deeper into the daily loss of 0.5-2%. If your risk is say 2 % of capital in a day. Say for Nifty futures margin is Rs 40000. The risk amount per day is 2% or Rs 800. So if you do 3 trades in Nifty in a day or lets say 4, then you cannot risk more than Rs. 200 loss per trade or 4 points. Your reward or profit per trade needs to be at least 2:1 times this risk or Rs 400 so that even if your success ratio is 50%, 2 winning and 2 losing trades you lose Rs 200 per trade = Rs 400 total, and gain Rs 400 per trade = Rs 800, with a net gain of Rs 400, you still are a winner. Target therefore for higher risk reward ratios of 3:1, if you can.
See the linkage of the winning trade %age of greater than 60% instead of 50% above and a modest risk reward ratio of 2:1. If these are met consistently, you are winning consistently and making money.
So here are your trading rules:
Decide your daily,weekly and monthly loss risk %ages of your capital.
Example Capital 100000, risk %age per day 2%= Rs 2000, Weekly 8% = Rs 8000 and Monthly 15% = Rs 15000.
This means you cannot lose more than Rs 2000 in all transactions per day, Rs 8000 in all transactions for the week and Rs 15000 for all transactions for the month.
Within each day, week and month, follow the following methodology.
End of each day/week/month:
Compute the trade win ratio = Your trades that were proftable after brokerage/(total trades that you did).
So if you did 8 trades in a day and 5 were profitable, your trade win ratio = 5/8 = 61% approx.
Analyse your winning trades. If your daily risk capital is Rs 2000 and if you allocated Rs 1600 to the risk for your trades, say at Rs 200 for each trade (it can vary for different scrips), did you win 2:1 = Rs 1600*2 = Rs 3200? The individual trades ratios are unimportant, so long as the focus is clear. If the profit number is not Rs 3200, review what went wrong, and confirm whether it was a major or minor issue with your system.
Now at the end of the day/week/month, do the above nos tie up?
Win ratio consistently > 60%
Profit for day > allocated and utilised risk capital - if it was Rs 1600 for a particular day - your profit must be Rs 3200.
Profit for week > allocated and utilised risk capital used that week. Say Rs 4000 - Your weeks profit must be Rs 8000 at least.
Profit for month > Allocated and utilised risk capital say Rs 12000 - Your profits for the month must be Rs 24000 or more..
Stop, review and fix issues, whenever, these benchmarks are not achieved.
Paper trade when you strart trading again, to ensure that you are on the right track. You NEVER lost money by
