ATMASphere Aug 2014

method that we will follow. Now why is money management
important?
Determining how much of a currency, stock or commodity to buy or
sell on a trade is an often overlooked aspect of trading. Traders
frequently take a random position size; they may take more if they
feel "really sure" about a trade, or they may take less if they lack
sufficient conviction. These are not valid ways to determine
position size. A trader should also not take a set position size for all
circumstances. Many traders take the same position size regardless
of how the trade sets up, and this style of trading will likely lead to
underperformance over the long run. Though there are quite a few
money management methods bordering on the sublime to the
ridiculous, we will take the Fixed Risk Position Sizing method for
simplicity
Hence the quantity the trader will trade is x/R = 20000/50 = 400
Nifty fut.
Situation 2: SL is 20 points
Hence the quantity the trader will trade is x/R = 20000/20 =
1000 Nifty fut.
Hence, by following a fixed risk per trade a trader’s position size
varies as per the risk though his absolute risk of loss remains the
same per contract. This method, though deceptively simple will
beat any fixed lots method. Another major advantage of this
system is that it will ensure much lesser drawdown on equity
compared to a fixed lots method.
Fixed Risk Position Sizing
1. Let us assume that the trader is ready to risk x amount per
trade
2. His system provides a precise stop loss ( R) ( this is terribly
important as no money management is possible without a
clearly defined stop loss point)
3. Hence, his position size per trade will be x/R
4. Let us explain this simple concept with an example. Say a trader
trading Nifty futures as per the Trend Breakout System is willing
to risk Rs.20,000 per trade
Situation 1: SL is 100 points.
Hence the quantity the trader will trade is x/R = 20000/100 =
200 Nifty fut.
Now in order to back test our system, let us make the following
assumptions:
1. We use a net capital of 3 lacs. This comprises margin equity
of 2 lacs and risk equity of 1 lac
2. In intraday trading, brokers allow day trades (to be
compulsorily squared off before market close) on a margin
of Rs.10, 000/- per contract of Nifty. Hence, a 2 lac margin
allows us to trade up to 1000 Nifty fut. ( 20 lots) on an
intraday basis
3. Our risk per trade will be Rs.20,000/- ( why Rs.20,000 and
not any higher or lower figure will be clear and will be
explained in the next part of this series once back testing is
completed )
Situation 2: SL is 50 points
AUGUST 2014 ATMASPHERE | 16