How much trading capital is good enough? To understand that, you need to understand the concept of EXPOSURE. So if the amount you need to need for margin on your trading positions is 60, and your trading capital is 100, then your exposure is 60%.
The thumb rule of our strategy on Money Management is to keep your trading capital at least TWO times of your maximum exposure desired i.e. your maximum exposure is 50%. Make sure your position is of such size as to conform to this rule. If your exposure is more than 50%, you are over exposed. Being over exposed will impact your trading decisions and may force you to liquidate at a loss.
To answer the question about the size of the trading capital and the number of lots to trade in the context of trading our basket of commodities on MCX, please refer to the 2 tables provided below - one is the optimum position sizing for a Trading Capital of INR 3 lacs and the other is for a Trading Capital of INR 10 lacs. Please print these tables for reference as you would need them while preparing for your trades.
Note : The only difference between the 2 is the inclusion of Copper in the latter - in the absence of mini lots, including Copper in the trading portfolio requires a substantially higher capital.
(Table 1.1 - Trading Combo for capital of INR 3 Lac)
(Table 1.2 - Trading Combo for capital of INR 10 Lac)
How to interpret the table - The first half of the table is the number of lots by commodity, margin required by the exchange (approximate), fixed SL (determined by us using rigorous backtesting) which gives the Maximum Loss by each commodity. This brings us to our set of rules for Money and Risk Management -
R1 - The Maximum Loss for each commodity should not exceed 2% of the trading capital (~6K for a Trading Cap of 3 lacs and ~20K for 10 lacs).
The second half of the table is the combination of the trading portfolio for 2 commodities. For example, 3 mini lots of zinc and crude each, such that 1 is from metals and the other from energy. The Maximum Exposure is about 50% (~150K for a Trading Cap of 3 lacs and ~500K for 10 lacs), which is within prudent limits.
R2 - The Maximum Exposure for all commodities taken together should not exceed 50% of the trading capital.
The Total Maximum Loss across the combination of commodities is less than 3% of the trading capital - 9K and 30K for the first and second tables respectively, again within acceptable limits.
R3 - The Total Maximum Loss for all commodities taken together should not exceed 3% of the trading capital.
4 such combos are recommended in the tables above, all respecting the above limits. The whole structure is designed to minimize risk. Needless to say, you can design your own combos depending on your Trading Capital as long as you do not violate the limits mentioned above.
Lets see a practical application of this. Say, you had a buy signal in 2 commodities during the trade preparation exercise before 5 PM - Zinc and Natural Gas. You decide to go for the trade on Zinc and Natural Gas once the trade selection criteria are met.
A simple excel sheet as below can be used for calculating your Max Risk and Max Exposure based on a Trading Capital of INR 5 lacs . You just need to input the closing price (@ C4 or C5, as applicable) of the chosen commodity in the second column. Depending upon your conviction, the number of lots can be tweaked such that your Max Loss, Max Exposure and Total Max Loss are within the prudent limits mentioned above. This is a simple tool but extremely handy to ensure that you follow the rules
Please click on "Next Post" to understand the concept behind PAYING YOURSELF as the trade moves in your favour - Profit Management.
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