In this video we will be discussing about the amount of capital which is required for trading.

In this video we will be discussing about the amount of capital which is required for trading. Now, it has always been seen, that traders are always in a dilemma about what amount of capital they should deploy for each trade, or how many shares should be bought or sold. But what is most important for us to keep in mind is Risk management. No one is always 100 percent correct in the markets. Trading in the markets is all about finding high, probably correct trades in the markets, and then act on the same with proper risk management. What has been mostly seen among people is, one day they are correct in the markets and they may earn around 15 % on their trade, and then they become over confident.

The second time they trade, the amount of capital put by them is doubled, leverage is doubled, but then what if they go wrong this time? The main point here is that, markets are all about sustainability. The market is not a one-time casino, where you come once, play, win or lose some money, have good entertainment and leave. If you treat the markets like a business, you need discipline. Businesses are not done for just a day. Consistency and persistence are prerequisites for any work to be done. You need time, discipline, planning and commitment to be successful. So, risk management is one of the keys to be followed for a stock market participant. To successfully trade with proper trades, you need to know what amount of capital should you be deploying for your trades.

The first thing to do when you decide how much capital you will deploy for your trade is, you need to know your account size, as in, the total amount of funds or capital which you have, which you have deployed, or set aside, for stock market trading. Now the rule is, your trading capital should be 30 – 40 % of your total capital. Whether it would be 30% or 40%, will depend on the amount of risk you can take. Your risk per trade should not exceed more than 2% to 5% of your trading capital. Let us understand this better with the help of an example. Say you have Rs 50 lakhs total as capital, which you can deploy for your stock trading and investments. So, assuming that you are a risk averse investor, the maximum amount of capital that should be deployed in your trading would be 30 % of Rs. 50 lakhs, which is equal to Rs. 15 lakhs. We must have one thing clear in our mind, that trading in stock markets will generate daily income.

It’s like your bread and butter, while wealth creation is done by long-term investments. So, we have deployed Rs. 15 lakhs for trading and Rs. 35 lakhs for your investments in the markets, and in different asset classes. Now, out of this Rs. 15 lakhs, your stop loss should not be more than 2% of this on a single trade. That is, 2% of Rs. 15 lakhs = Rs 30,000. So, maximum loss which you can bear on a single trade will be Rs. 30,000. Accordingly, you will decide the quantity of shares to be bought and sold. Another thing which is to be kept in mind is the risk-reward ratio. The trades you take up in the markets, should be having a risk reward ratio of at least 1: 2 or higher. The higher the ratio, the better it is.

If we follow these simple risk management techniques, with strict discipline, and our success ratio is only 50% in the markets, even then we can be winners in the market. We hope this video can add value and help you increase efficiency in your trading style.