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What is the account size do I need to start in trading?
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Trading is another side of speculation, it not only require smartness but also luck to flourish. It has to be understood by you that, you cannot risk your full account size and it is always important to define pros and cons prior to trading.
You always have a ‘catastrophic stop’ to define the ‘ruin’ before commencing any trade. Let us take an example of Rupees 10000 account for trading. You stop trading if you incur Rupees 2000 or more as losses. This clearly explains that you are ruined if your account decreases to Rupees 8000; although you invest Rupees 10000 you risk only Rupees 2000.
You can have an amount as low as Rupees 5,000. All you need is money for margins payable upfront to exchanges through brokers. The margins range from 5%-10% of the value of the commodity contract. While you can start off trading at Rupees 5,000 with ISJ COM trade other brokers have different packages for clients.
For trading in bullion, that is, gold and silver, the minimum amount required is Rupees 650 and Rupees 950 for on the current price of approximately Rupees 65,00 for gold for one trading unit (10 gm) and about Rupees 9,500 for silver (one kg).
The prices and trading lots in agricultural commodities vary from exchange to exchange (in kg, quintals or tones), but again the minimum funds required to begin will be approximately Rupees 5,000.
Moving back to our query – “What account size do I need?” You have to consider all the factors effecting the trading and the first factor is the margin required by the exchanges. The margin is the ‘security deposit’ that you need to have your account if you ant to trade. It depends on the contract you want for trading. For e.g. Rupees 3,938 is required for the e-mini S&P and Rupees 1,688 for the 30 year Treasury Bonds. Many brokers offer a 50% on this margin requirement if you day trade, i.e. you open and close the position on the same day.
If your trading system requires trading 1 contract of the e-mini S&P, and you hold the position overnight, then you need at least Rupees 4,000 in your trading account.
The next factor is the expected drawdown. Taking the same example into consideration - If you would only deposit Rupees 4,000 in your trading account, the first trade moves against you by more than Rupees 62, and the value of your account falls below the margin requirement of Rupees 3,938, then you receive a "margin call". Many electronic platforms automatically liquidate your open positions, and don't let you trade any longer. Therefore, you need to know the maximum drawdown of your trading system in the past.
Let's say your trading system had a maximum drawdown of Rupees 2,200 in the past, and then you need at least Rupees 6,200 in your trading account: Rupees 4,000 margin requirement plus Rupees 2,200 "buffer" for a possible drawdown. A safe approach is to double the maximum drawdown, because usually the worst drawdown is still to come. Based on these calculations you decide to fund your account with Rupees 8,000, and you define your "ruin" as Rupees 6,000, i.e. you are willing to risk Rupees 2,000 for your trading adventure.
Once you have understood the trading system that is likely to achieve the similar results in the future, then you can use the log-normal distribution to calculate the risk of ruin. In the following example we will use the values of our e-mini S&P Trading System "Coin Collector". The profit factor of this system is 1.42, i.e. for every dollar you lose you earn Rupees 1.42. The winning percentage is 70.5%, and the average winner is Rupees 129. Using these figures and the results of the past trades, you can calculate the "risk of ruin" for our system. The probability of losing the whole Rupees 2,000 that you are willing to risk in the next 30 trades only is 1.4%. That's very low. If you decide to risk Rupees 3,000, then the probability of losing all the money in the next 30 trades decreases to 0.07%.
Hence, we can conclude that your account size is determined by the margin requirement set by the exchanges and the "buffer" you should have for an expected drawdown. Always keep in mind that these figures are only valid if you developed a robust (and not a curve-fitted) trading system.
Using some statistical functions, you can then determine the "risk of ruin" and the probability of making a certain amount of money. That's what trading is all about: risks and rewards.
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