The Hindu Business Line : Trader's Corner

All of us are aware of the cardinal truth that trading is no path of roses. We all have to flounder, make every single mistake there is to be made until we are well hardened and cynical enough to face the ups and downs in the market.

Of course, there are many who give up after the first few months. The reason for this withdrawal can be many. But one simple mistake that can be avoided by most traders is ensuring that they have enough capital in their accounts before they start trading. It is a bad idea to start trading with your pocket money or money borrowed from friends and relatives. A shoestring capital can be wiped out in a single day. Losing your capital can be a pretty disheartening experience, till you learn that everyone else have seen their account being wiped clean at least once in their trading career. The question that arises next is: How much capital should a trader start out with? Day traders feel that they do not need too much money in their trading account as they square up their trades at the end of each day.

That is not really correct. It is always beneficial to have as much money in your trading account as would be required to pay for the delivery of 100 shares of the stock you are day-trading in. The thought of all that money lying in your account lends confidence. And confidence makes all the difference in day trading. As far as trading in futures and options is concerned, the capital you have in the trading account should be dependent on the amount of risk that you are ready to take. One benchmark that can be applied is that loss per trade should not exceed 2 per cent of your total capital.

Depending on the loss that you are ready to take per trade (1 per cent or 2 per cent), the capital in your trading account can also be projected accordingly. To elucidate, if you are trading in 1 lot of Nifty futures, a 1per cent loss would amount to Rs 3,200. So, your trading account should have Rs 3,20,000, if you wish to keep a 1 per cent stop loss. If you are comfortable with a 2 per cent stop loss, the trading account should contain Rs 6,40,000.

It has been seen that many traders who managed to return to the stock markets with deeper pockets have been able to weather the losses much better and to emerge as successful traders. Having enough money in the trading account reduces stress levels. This leads to fewer mistakes in trading.

Lokeshwarri S.K.

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