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!

Money management is nothing but risk management. It is the part of your trading plan (or trading system) that tells you how much money (as in % of trading capital) should you risk in a single trade.

Money management (risk control) is is the most important component to your trading success. You could have the best trading system in the world, but without proper money management you could lose your entire trading capital.

So how much of your trading capital should you risk in a single trade?  This all depends on your trading capital. If you have a very large trading capital, it should not be more than 0.10-0.50% of your trading capital. If you an individual with a trading capital of Rs. 1,000,000.00 (Rs. one million), then your maximum risk per trade should not exceed 2% (Rs. 20,000.00) of your trading capital.

If you trade Nifty Futures with a trading capital of Rs. 1,000,000.00 and the difference between your entry price and stoploss is 100 points (or Rs. 5,000.00), the maximum number of Nifty Futures contracts you could take a position in would be only four.

Money management thus dictates the number of shares or contracts that you should ideally trade in to keep your maximum loss per trade within your money management rule.

Sound money management and risk control are the keys to being a profitable trader. It is not the prediction or the latest and greatest indicator that makes the profit in trading, it is how you apply sound trading discipline with superior cash management and risk control that makes the difference between success and failure.