Managing DAILY Loss - Key to Nifty day trading

I have always believed that you must track your trades. Please see my earlier post on this topic here . At any point of time, you should know the percentage of profitable and losing trades as well as the average profit and average loss per trade.

Now in addition to the above, you should also have a limit - self imposed - on what the maximum amount you will allow yourself to lose on any given day. In the literature on trading, this is usually suggested as a certain percentage - say 2% - of your trading capital per trade. In other words, if you are trading 2 mini nifty in each trade , you will probably need a capital of around 1 lakh. So according to classical analysis, you must limit your LOSS PER TRADE to no more than 2000/-. Assuming that you make at least two trades per day, your maximum loss can easily go up to 3000-4000/- on a bad day.

ON THE OTHER HAND, the day you are profitable what is the average amount you are making? Using my experience of the last 14 months, and also browsing the sites of trading call providers, I believe the average daily profit is in the range of 40 nifty points - which if true is actually very good since it is 0.8% of the current Nifty value. In other words, trading mininifty, your average profit over the days you are profitable is likely to be around 800/-.

Do you see the picture emerging? You are making about 800/- on the good days. BUT ONE BAD DAY can push you back by 3000-4000/-. and then you will need one GREAT WEEK to come out even.

You may disagree with the details of the analysis in which case my suggestion is that please do your own analysis and see what you get.

But the central point is that you must set a limit to the maximum loss that you can afford in a day, and this maximum loss must be related to the average profit you make, For example, if your average profit is 800/-, then it is prudent to set the maximum daily loss limit at 1000/- to 1200/-. On any given day, if you have already lost 1200/- QUIT FOR THE DAY, and come back to fight for another day.

I will come back to this theme again and again in my posts, hope that it helps you in your trading practice and discipline.

If you have any comments please write to me at stockmarket.methods.in.madness@gmail.com

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Disclaimer: The above analysis is just that - my analysis. If you choose to trade on the basis of this analysis, you will be solely responsible for the outcome of the trade - profit or loss. Please keep in mind that trading and in particular day trading is not for the novice and there is significant risk of loss of capital in trading