4 Money Management Rules

4 Money Management Rules

Dear Trader As trading is an enterprise to make a profit in an atmosphere of wide-ranging probabilities, a flexible approach is a must. Therefore, the following four rules are not supposed to be taken as sort of traffic rules that need strict adhering to. They are more like a checklist of do’s and don’ts – a bit like the routine a pilot goes through before pressing the ignition button. Nevertheless, a new trader would do himself a great favour by sticking to them as the traffic rules for a while. CAP rule Count All Pennies involved in the total monetary value of the instrument to be traded beforehand. Especially the hidden ones that come up gift-wrapped in the form of Leverage, because Leverage is the real villain responsible for dispatching the trading capital on the road to hell more than often.     Let’s say, for example, that a nifty contract can be traded MIS for under 20,000 and as NRML for about 50,000. Now, this 20k leverage is the 25th part of approx. Rs. 500,000, the actual value of 75 shares of Nifty. The leverage thus is 25 times. So a trader with 100,000 trading capital can easily trade 3-4 contracts in one go, right? Wrong. What gets forgotten is that one Nifty contract will move with the full weight of 500K, not with that of 20K. That is, loss and profit will be calculated in terms of full value, not in terms of leverage. One simple rule to follow to save yourself is to make sure you never lose more than 2% of your capital on a...