In the world of trading, the concept of exposure is crucial for effective money management. Exposure is essentially the percentage of your trading capital that is tied up in margin requirements for your trading positions. For instance, if you need a margin of INR 60 for your positions and your trading capital is INR 100, your exposure is 60%.
Our strategy emphasizes keeping your trading capital at least twice the amount of your maximum desired exposure. Ideally, your maximum exposure should be capped at 50%. This means your trading capital should be twice your maximum margin requirement to avoid overexposure, which can negatively impact your trading decisions and may force you to liquidate at a loss.
Example: Trading Mini Nifty Futures
Consider trading mini Nifty futures, where a single lot requires a margin of around INR 67,000. Our strategy involves trading a minimum of three lots, requiring a margin of approximately INR 2,00,000 (INR 67,000 * 3). To adhere to the exposure rule, the minimum trading capital needed would be twice the margin, i.e., INR 4,00,000. For each additional lot, you need to add approximately INR 1,40,000 to your trading capital. Thus, with a trading capital of INR 10,00,000, you could comfortably trade around seven lots.
Please refer to the table below for a complete understanding of Max Exposure, Stop Loss and Maximum Risk for different sizes of Trading Capital.
Trading Capital (INR) | Max Exposure @ 50% (INR) | Number of Mini Lots in NF (25) | Max Stop Loss (Points) | Max Loss per lot (INR) | Max Risk < 2% of Capital (INR) |
4,00,000 | 2,00,000 | 3 | 80 | 2,000 | 6,000 |
5,40,000 | 2,70,000 | 4 | 80 | 2,000 | 8,000 |
10,00,000 | 5,00,000 | 7 | 80 | 2,000 | 14,000 |
(Table 1.1 - No of lots for capital of INR 4-10 Lac)
The above table brings us to our set of rules for Money and Risk Management -
R1 - Maximum Loss Per Trade - The maximum loss for each trade should not exceed 2% of your trading capital. For example:
Trading capital of INR 4,00,000: Maximum loss per trade = INR 8,000
Trading capital of INR 10,00,000: Maximum loss per trade = INR 20,000
R2 - Maximum Exposure Per Trade - The maximum exposure for each trade should not exceed 50% of your trading capital. For example:
Trading capital of INR 4,00,000: Maximum exposure per trade = INR 2,00,000
Trading capital of INR 10,00,000: Maximum exposure per trade = INR 5,00,000
R3 - Total Maximum Loss - The total maximum loss for all trades combined should not exceed 3% of your trading capital. For example:
Trading capital of INR 4,00,000: Total maximum loss = INR 12,000
Trading capital of INR 10,00,000: Total maximum loss = INR 30,000
Applying R3: An Example
Let's say you have a trading capital of INR 4,00,000. If you incur a loss of INR 4,000 on a trade in the morning, the remaining allowable loss for another trade that day is INR 8,000 (3% of INR 4,00,000 is INR 12,000, less the INR 4,000 loss).
You can then take a second trade with three lots, ensuring the maximum stop loss (SL) does not result in a loss greater than INR 8,000. If the trade has a higher SL, adjust the number of lots downwards to keep the maximum loss within the acceptable limit.
By adhering to these rules, you can manage your exposure and risks effectively, ensuring your trading decisions are not compromised by overexposure.
Stay tuned for the next post where we will discuss the concept of "Paying Yourself" as the trade moves in your favour - Profit Management.
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