Most traders who want to trade the Indian futures markets seem to be highly under capitalized. Not only are they under capitalized but they have a very high expectation of returns.
This limited trading capital makes traders take highly leveraged positions. A single loss in a highly leveraged position could easily wipe out 50% of your trading capital. To recover from this large 50% loss a trader needs to make a 100 percent return on our remaining trading capital just to reach break even. The bigger the draw down the more difficult it is to pull yourself out of that. A few losing trades later and the trader has blown his entire trading capital.
Another big mistake under capitalized traders make is to use tight stoploss levels. Because of their limited trading capital traders are forced to use extremely tight stoploss levels. Market volatility triggers these tight stoploss levels and leaves the trader with a string of losses (and even less trading capital). Most traders fail to understand that the ideal stoploss needs to be at least 1.5 -2 times the underlying securities average volatility.
It’s no secret that the higher the trading capital you start with, the easier trading becomes. Also a large trading capital will enable you to take a string of losses without making a big dent in your trading account.
Ideally I would recommend traders not to risk more than 2% of their trading capital in a single trade. Let’s look at an example of the two percent rule in action. If we had a trading capital of Rs. 500,000.00, by setting the two percent rule, we set our maximum loss to Rs. 10,000.00 on any one trade. So you would need a string of 50 losses in a row to loose your entire trading capital.
With most trading systems the chances of getting 50 losses in a row is very, very slim. However, the chances of going broke and losing all your trading capital are even smaller than that because when you implement the two percent rule correctly, that two percent is actually calculated on the current available trading capital. This ensures that as your trading capital increases you take larger risks(losses) and as your trading capital shrinks you take smaller risks(losses).
If you want to have a successful trading career build a sizable trading capital before taking the plunge!
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