Crucial factors that can help avoid trading losses

Managing margins, market lots, position size leverage and brokerage is more important than any contract-selection process for a trader. Every time an intra-day position is taken, hoping to exploit a small price move, those numbers have to be at the finger tips.

Most stock and index futures require 15-20% of the contract value on margin. So, a one% swing in the underlying will gain or lose about 5-6% of the margin. A short option position requires the same margin as an index futures. Currency futures leverage is close to 1,000:1 – a one paisa swing in an USDINR or EURINR contract will gain or lose Rs 10.

 

Most experienced day-traders use the market lot to keep a running score. If the market lot is 1,000 shares and there’s a gain or loss of one rupee, you get a credit or debit of Rs 1,000, less brokerage and securities transaction taxes. Before entering a trade, it is possible to make a quick, dirty stop-loss calculation on that basis. The more disciplined will examine the volatility of the given contract, and calculate the minimum likely loss in case of an adverse swing.

Somebody trading a stock futures with a large market lot of say, 4,000 shares, could be badly exposed, or stand to gain a large amount. A move of a couple of rupees could come within a few minutes if a trend develops suddenly. If positions are carried overnight, and the contract moves adversely in the last half-hour of trading (after the derivatives segment has closed) or it opens trending in the wrong direction, the trader might be badly wrong-footed. 

Brokerage adds another element of cost. There’s no point in entering a currency contract unless you’re expecting a swing of considerably more than 10 paisa – you will pay that much in entry-exit brokerage combined. Similarly, option brokerage is around Rs1/unit – that is Rs 50 per Nifty market lot on the entry and ditto on the exit or settlement. 

A lot of traders lose money because they pay insufficient attention to these factors before they take a trade. Another factor to be considered is, how much do you keep in reserve for averaging, or pyramid trades? This depends on your style. Do you average or pyramid at all?

A third factor is, how many contracts can you track simultaneously? If you get a phone call at the wrong instant as a stop loss is triggered, or you simply have too many positions out, you could end up losing a large sum through inattention.

There are no hard-and-fast answers to these questions but any trader must consider them and have his own answers. The most successful trading systems focus on these issues far more than on trade-selection and that’s not accidental.