Does retaining trading profits with the intention of increasing trading capital really works? Especially when your initial capital base is low approx 15-20lakh.
Only answer if you have actually experienced this, i don’t want to hear theoretical magic of compounding from newcomers.
if you have an edge and are a consistent option seller, it should work well. If you want to be conservative with it - simply put it into liquid funds or liquidbees and increase your margin.
If you are not reinvesting - what do you plan to do with the trading profits?
It actually works only when you have lower capital. You naturally tend to take higher risk and are willing to take higher drawdown with a lower capital. This naturally makes your return relatively high and compounding makes a lot of sense to grow that capital. Once you accumulate large capital, you tend to take lower risk (for lower dd) and make lower returns (i.e. compounding has less effect)
Trading also has capital constraints, it isn’t infinitely scalable. Indian markets are very nascent, so not a lot of opportunity to deploy huge capital.
So, compound with lower capital. Diversify to other avenues as capital becomes too big to deploy in the market.
yes, compounding is absolutely essential till capital reaches very comfortable stage. As long as slippage is reasonable( have to measure), we can keep scaling up. Once its too much take more positions by adding more signals/systems.
On something like weekly options, scaling up should be easy i think, its so liquid ( just looking at orderbook).
I have done this for 3 years in stocks cash intraday where volume is much lower. Its possible, i have had to work for it by improving execution and diversify entries/systems. Still, much better to trade in liquid things for scaling up so once i am done with current work, will look at NF/BNF and then likely options.
Without compounding, if capital is low, i don’t think trading is worth it. Target capital has to be multiple cr imo. A thumbrule i learned is to target 3x target income atleast because trading has a lot of uncertainty built into it. Another way to look at it is if we can be in top x% of country by being profitable, we really should be reasonably rich.
I used to have this fear earlier when my capital was multiple times lower, esp during drawdown phases, that my own orders might effect results and edge is degrading because of scaling up. But it was just a bad phase.
Disagree, to me taking high risk is lottery mentality irrespective of capital size. So i always try to keep DD low enough. ofc this is subjective.
And yeah, we can try our luck with higher risk, and with low capital there is a need to do it. Hence better to have good capital. So for me compounding is same irrespective of psychology. But markets have limits too and there i agree - As capital grows returns will obv get lower. Otherwise ambani adani would be trading.
One big advantage of larger capital is that its much easier to deal with setbacks in trading - and they will happen sooner or later.
you can buy 10 rupee lotto tickets too, low risk? High/low risk has nothing to do with lottery mentality. Any calculated risk taking is trading. While blind risk, no matter low/ high is gambling/lottery.
You can take high risk and be a responsible trader, you can take low risk and be a gambler.
What i mean is i don’t see why we can’t use same risk, irrespective of capital. If its too high for large capital, than its probably too high for small capital too. ofc, its subjective. High risk might be 10% to you and 50% for someone else ( i know someone who trades with that kind of DD with small capital). To me trading like that IS lottery trading as you don’t account for future uncertainty.
And its fine to reduce risk as capital increases too i guess, but not needed either. We can reduce risk by diversifying into multiple systems too. So that is all subjective but my main point was that its not imperative to reduce risk as capital increases if risk we took was always reasonable.
Anyway, What i can say is that my own capital is now many multiples times what i started with ( through additions and returns), and i take similar risk at single system/trade level even today. I have reduced my risk overall, but by improving edge at system and portfolio level.
I absolutely agree that it is logically correct. Just saying, it isn’t what i did or would recommend. My goal was to not have to care about money. So, the only way to grow my small capital quick was to take higher risks and go through high drawdowns and the psychological strains that come with high dd. I was okay with that.
I now have a very relaxed approach to trading with extremely low tolerance for drawdown (& proportionally low returns). But this privilege is only because of my past high risk taking when capital was small.
Yes it works. I have been doing this for the past 5 yrs.