Right now I am traiding stocks with strict risk management. I risk only 1.5% of my capital. I only use 2x margin. I am able to make 10% return per month. Now I am planning to put my hands in nifty and bank nifty. Since it is F&O with fixed margins and quantities, how exactly should I implement position sizing and risk management.
Any tips will be very helpful.
Thanks.
Don’t mend something that is not broken.
If you really are able to get 10% returns in a month (I’m assuming that you have a decent risk reward ratio and you control risk) you should continue what you are doing. Don’t shift.
If you want to trade in Nifty and Banknifty, if you just started trading in index options I would suggest first try Nifty. If you are confident enough after few trades in Nifty then go for Banknifty. Because movement in Banknifty is more and if will be very quick compared to Nifty.
This is not a golden piece of advice but I wished that someone had told me the same thing when I started in index futures and opions.
When it comes to position sizing and risk management the cost of selling one lot of Nifty futures is 1.7Lakhs (Zerodha NRML)
My advice on Position sizing
NOTE: If i mention sell that means it is a full trade (buy and sell)
Say you got 5 Lakhs capital. You can sell 3 lots in nrml and 6 lots in intraday by taking 2x margin.
My suggestion is to sell 1 or 2 lots less than what you can sell. Suppose in this case you can sell 6 lots, but my suggestion is to sell only 4 or 5 lots. After you earn 1.7 lakhs as profits then increase your position size to 6.
This looks like a bummer. But believe me your risk management and your psychology will improve a lot.
Risk management
1. The most important thing is to give. Give your stoploss. Dont let market to grab away your money. Before it dose you give market the amount you are willing to lose. Dont wait for market to go up even after your stoploss is hit. Exit your position.
2. My suggestion is dont fix your risk or stoploss and reward in terms of percentage. Because you may not achieve the money you are targeting. Let me explain you why…
Suppose your risk and reward you re ready for a single trade is 2% of your capital. (you said 1.5% but lets take 2 % for easy calculations)
As we assumed your capital is 5 Lakhs. Your risk is 2%of 5 lakhs that is 10000 rupees.
Suppose yesterday you took long position and lost. Today you took long position and you won. Then lets see what happens in this case.
Day 1 (yesterday) - Your capital 5 lakhs. Since you lost, you will lose 2% of your capital that is 10,000. So your capital at end of the day your capital is 4.9Lakhs.
Day 2 (today) - Your capital is 4.9lakhs. Since you have won, you will win 2% of your capital that is 9,800. At end of day your capital is 4,99,800.
Even if you did win 1 day and lose 1 day you are in net loss of 200 rupees.
So my suggestion is not to take profit and loss as in percentage. But define your risk and reward in amount of money. This hepls you to quickly analyze your money and risk you should take and saves few minutes from calculation.
Hope this helps…
Thanks for the answer.
Let assume,
Nifty future price is at = 15000
And your view on nifty is bullish so you initiated a long position.
Applying PERCENTAGE RISK METHOD :-
Capital :- 5,00,000
Entry price :- 15000
Stop loss price :- 14925
Percentage Risk per trade :- 2% = 10,000
Risk per contract :- 14925-15000 = 75
So, risk per lot :- 75*75 = 5625
Now, no of lots to buy :- 10,000/5625 =2(approx)
Am i right sir @ShubhS9
I use this method to control risk