Monday, January 9, 2012

Intraday Trading : How Much Profit Expectation You Keep ? Magic of Leverage

Intraday trading inspite of being a difficult terrain brings lot of opportunities for the traders.For an intraday trader profit expectation is a very dynamic concept. The sudden changes in market conditions play an important role in increasing and lowering the profit expectation of a day trader.

If we take the example of NIFTY Index Futures trading we can very well calculate that what excellent opportunities the market offers a day trader to earn a whopping income.The requirement though on the part of the trader to generate good profits is sheer discipline.

When a day trader thinks of profit in terms of percentage then 1% profit per day seems quite good. This is a very genuine profit expectation of an involved trader as a trading for living concept would justify this expectation.

Now we analyse the reality of 1% profit after taking into account the role of leverage.In our example we take NIFTY Index Futures trading as our basic instrument for the purpose of Intraday trading. NSE has allowed a 10% - 11% threshold as margin for trading in NIFTY Futures.

So in current scenario when NIFTY is trading at 4700,1 lot of NIFTY consisting of 50 shares the value of NIFTY comes out to be 4700*50= Rs.2,35,000.If there had been no provision of leveraging, this was the amount we would need to trade in NIFTY Index Futures.

1% profit of 2.35,000 [capital required] amounts to Rs. 2,350. Now this means that we should get a 47 point profit in a day for achieving this 1% profit. As a disciplined trader this is quite possible consistently but for a starting out trader this capital requirement is a bit on the huge side. 

We should now take into account the magic of leverage which allows a trader to trade in a higher value instrument at a 10%-11% margin money of the total capital required. So 10% of Rs. 2,35,000 is Rs. 23,500 . Normally this will be the amount required for a trader to trade in NIFTY Index Futures allowing a trader to deal in big money inspite of less capital.

Now lets see that if a trader gets a 47 point profit that is Rs. 2,350 with the disciplined approach what is the actual profit percentage . This calculation should be done on the actual capital employed for the trade i.e. Rs. 23,500.

So 2,350 /23,500 *100 = 10% profit. So a 1% profit expectaion in a NIFTY futures trade actually is a 10% profit percent or ROI on the actual capital employed. This is the real magic of leverage. But same applies in the case of a loss too as the loss % is also magnified on account of leverage.

A trader therefore should be realistic and be disciplined in approach . The foremost thing which should be kept in mind by a trader is to cut one's losses and let the profits run.

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