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Short note on MM

 
Post new topic   Reply to topic    iCharts Discussions Forum Index -> Risk / Money Management
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Author Short note on MM
skd2012
Yellow Belt
Yellow Belt


Joined: 03 Oct 2012
Posts: 948

Post: #1   PostPosted: Fri May 17, 2013 10:26 pm    Post subject: Short note on MM Reply with quote

While traders spend 90% of their time and energy for finding/developing good strategy or for discussing which way market can move and how much market can move, we tend to ignore important aspect of trading. Basically there are three pillars of a good trading system i.e. 1. good money management rules, 2. good trading system, 3. Good emotion control / psychological rules. I intend to put a few lines on money management rules. Hope all of you are following them! Please put a line if you are following something superior than these.

I am telling all these for a day trader of NIFTY future and NIFTY option mainly. Also these may vary based on traders to traders

1. Trading capital: Say one has 200000 rs (hypothetical figure) as trading capital. Since trading is a highly risky business, one needs to consider that he/she is fine if they lose this whole trading capital. Or else, use less money than what you have, but mentally agree about full loss. Once we accept this in starting, it helps in psychological battle in trading.

2. Loss per trade: Max 3% per trade I feel. Every trade we take it should be within this limit irrespective of what a big opportunity we have in-front of us. So initial SL and position size should be such that, we should not lose more than 3% i.e. 6000 rs. For example, if I wish to buy 6100 CE at 120 rs, and my position size is 500 (10 lots), then my SL should not be lesser than, 108 ((120-108)*500=6000 rs). If we think, 108 is not a good initial SL, then avoid the trade, or reduce position size to keep 6000 rs loss as max figure. Use your technical system for identifying entry, initial SL, but vary position size for this 3% money management rule. The same is applicable for Nifty future trading.

3. Ride part of your wining position: Though we are putting strict rule for 6000 rs max loss, we do not want to keep any limit for profit. Smile When we are in wining position, whatever mind says, always ride part of your wining position (50% at least) with appropriate TSL (trading SL) till market close. Normally it will give good results, beyond what our mind can think/understand.

4. Take out profit: Set a rule when you want to take out profit. Say when profit grows to 20000 rs (10%) in above example, take out money out of trading account. However we do not add new money when we lose.

5. If three consecutive trades hit SL, we need to stop and analyze those failures.

There are many psychological rules, many of those are subjective and are different from money management rules. As you can see, these are specific!

Good traders already follow them. If you do not follow, try to follow them and see difference. Helps in wining emotional battle in market.

Hope you find it useful.
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vinay28
Black Belt
Black Belt


Joined: 24 Dec 2010
Posts: 11748

Post: #2   PostPosted: Sat May 18, 2013 11:31 am    Post subject: Reply with quote

One way followed by many stalwarts is to trade with 80% of net capital left with them. e.g. if they trade initially with 1 lac and loose, say, 10K, they trade with 80% of balance i.e. 72K, etc. When they make profit, they never put in all the profit but start with 20% of profit increasing it slowly to, say 50% (max.) of profit + initial capital.
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mogili
Green Belt
Green Belt


Joined: 29 Jan 2013
Posts: 1025

Post: #3   PostPosted: Sat May 18, 2013 8:53 pm    Post subject: Re: Short note on MM Reply with quote

skd2012 wrote:
While traders spend 90% of their time and energy for finding/developing good strategy or for discussing which way market can move and how much market can move, we tend to ignore important aspect of trading. Basically there are three pillars of a good trading system i.e. 1. good money management rules, 2. good trading system, 3. Good emotion control / psychological rules. I intend to put a few lines on money management rules. Hope all of you are following them! Please put a line if you are following something superior than these.

I am telling all these for a day trader of NIFTY future and NIFTY option mainly. Also these may vary based on traders to traders

1. Trading capital: Say one has 200000 rs (hypothetical figure) as trading capital. Since trading is a highly risky business, one needs to consider that he/she is fine if they lose this whole trading capital. Or else, use less money than what you have, but mentally agree about full loss. Once we accept this in starting, it helps in psychological battle in trading.

2. Loss per trade: Max 3% per trade I feel. Every trade we take it should be within this limit irrespective of what a big opportunity we have in-front of us. So initial SL and position size should be such that, we should not lose more than 3% i.e. 6000 rs. For example, if I wish to buy 6100 CE at 120 rs, and my position size is 500 (10 lots), then my SL should not be lesser than, 108 ((120-108)*500=6000 rs). If we think, 108 is not a good initial SL, then avoid the trade, or reduce position size to keep 6000 rs loss as max figure. Use your technical system for identifying entry, initial SL, but vary position size for this 3% money management rule. The same is applicable for Nifty future trading.

3. Ride part of your wining position: Though we are putting strict rule for 6000 rs max loss, we do not want to keep any limit for profit. Smile When we are in wining position, whatever mind says, always ride part of your wining position (50% at least) with appropriate TSL (trading SL) till market close. Normally it will give good results, beyond what our mind can think/understand.

4. Take out profit: Set a rule when you want to take out profit. Say when profit grows to 20000 rs (10%) in above example, take out money out of trading account. However we do not add new money when we lose.

5. If three consecutive trades hit SL, we need to stop and analyze those failures.

There are many psychological rules, many of those are subjective and are different from money management rules. As you can see, these are specific!

Good traders already follow them. If you do not follow, try to follow them and see difference. Helps in wining emotional battle in market.

Hope you find it useful.


Nice thoughts. Very useful. Nothing more to add.
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skd2012
Yellow Belt
Yellow Belt


Joined: 03 Oct 2012
Posts: 948

Post: #4   PostPosted: Tue May 21, 2013 6:16 pm    Post subject: Reply with quote

mogili & vinay28, thank you for your participation.


It is important to keep psychological balance while playing in market. If one does not follow strict MM rules (not necessary in the way I have written here), market (loss/profit) will play in our mind, which leads to all short of wrong decisions. If our mind does not work, trading account cracks down faster than we expect.

Along with this, we need a trading system, which has an edge over others in market. But clearly we have two types of market moves. They demand different tactics to make money, if not a different trading system.
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bharatpatel
White Belt
White Belt


Joined: 26 Oct 2011
Posts: 396

Post: #5   PostPosted: Tue May 21, 2013 10:14 pm    Post subject: hi Reply with quote

Dear S K D,

Your This post sounds helpful.

Actually i was trying to develop a trade management system relating my capital. It will surely guide me to define one.

Thanks,

bharat.
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