CAPITAL ALLOCATION- A trader’s key to become PRO
Before explaining the Capital allocation part, Let me explain three types of Trading
- Day Trading (Intraday)
- Swing Trading (Trade runs for multiple days)
- Positional Trading or short term investment (Trade runs for multiple weeks to months)
Allocate your capital in different proportions to all the three and analyse your performance. This capital allocation is optimum for achieving 20-22% on your capital by end of year very easily. We will discuss in detail with all calculations.
WE will understand this with example say 10,00,000 total capital
Allocate capital in three parts
- Short term investing (50%) – 5,00,000
- Trading (30-40%) – 4,00,000
- Cash (10-15%) – 1,00,000
DIVIDE Trading capital into Swing trading (70%-75%), 3,00,000 approx and Day trading (30%), 1,00,000
Short term investing or Positional Trading – 5,00,000
Swing trading – 3,00,000
Day Trading – 1,00,000
Cash – 1,00,000
Your Maximum loss in each category shall be equal to 1% (trading) or 2% (short term investment) of capital as per the risk appetite. Now explaining each part in detail.
Short term Investing or Positional Trading – Only trade in CASH in this segment without leverage. Trade on higher time frames such as Daily or Weekly or Monthly. Look for possible momentum breakouts where the movement in favor goes to minimum 10-20% in one stock. Try to churn the portfolio under this segment on achieving 15-20% on return in 1 stock or trail your stop losses.
Now if you take say 12 trades in a year, keeping strike rate of minimum 50% (which is easily achievable in positional trading) and Risk reward of minimum 1:3
Profit – 6 trades (50%) = 6*30000 = 1,80,000
Loss – 6 trades (50%) = 6*10000 = (60,000)
NET profit = 1,20,000
Swing Trading – Trade in futures of options keeping your risk 1% or 2% as per your risk appetite. Trade on time frames of 30 mins, 1 hour or daily. Now here we expect 4-5 trades in a month, so overall approx 50 trades in a year.
The motive here is to take a minimum of risk reward of 1:2. Having a minimum strike rate of 40% (easily achievable), let see the calculations
Profit Trades- 20 (40%) – 20*12000 = 2,40,000
Loss Trades – 30 (60%)- 30*6000 = 1,80,000
NET profit = 60,000
However in swing trading, normally the strike rate is also good and even Risk Reward is also good, but we have taken least possible values.
Day Trading – Now here is the key point why this diversification of capital works better. Allocation of your Intraday trading capital with risk of maximum 1 % on Intraday capital is bare minimum if we compare to our total capital. In our case 1000 will be the maximum loss per trade in Intraday Trading.
We take a maximum of 2 trades in a day and take a Risk reward of 1:1.5 with a strike rate of minimum 45%.
Total trading days in a month -22 days
Max trade in a day – 2
Total trades in a year – 22*2*12 = 528 trades
Profit = 238* 1500 = 3,57,000
Loss = 290*1000 = 2.90,000
NET profit = 67,000
CASH – Now this is the most important part to keep cash aside for any opportunity you get at major events in markets. Keep this cash in your savings account, now even if you don’t get any opportunity in markets you will still be getting a minimum of 4% on your savings account in the bank. In our case it will be 4000 but you may earn 8-9% if opportunity strikes.
Now calculating Profit under all the segments :-
Positional = 1,20,000
Swing = 60,000
Day trading= 67,000
Cash = 4,000
Total = 2,51,000
Profit of 2,51,000 is around 25% of total capital. Now the key conclusion on this whole allocation is that even after taking the minimum strike rate you are able to achieve some good targets and compounding at this rate can make wonders. Now even we calculate 20% less profit than calculated, we get around 20%. And I am sure if you follow these rules, you could have a much higher return of more than 25%.
Now, this looks so easy while calculation is being shown, one needs to follow this risk management like a saint to achieve the desired targets. This is also helpful in finding your trading style as in which segment gives your Good returns in a longer period of time.
This is just a glimpse of how you can manage your own fund and make wonders with the compounding