What is the ideal size?

Apparently professional traders are often asked about the minimum account size one must have to trade in futures. There’s a long answer and a short answer for this. You can find the short answer on twitter somewhere so I will walk you through the long one.

Lets say there are 10 stocks you trade very regularly. You have also done backtesting of your strategy to figure out the idea stop loss that is required.

Stock	Lot Size	CMP	Stop Loss (%)	Stop Loss (Rs)	Stop Loss/lot
RELIANCE	505	1945	3	58.35	29,500
HDFC	300	2195	3.5	76.825	23,000
HDFCBANK	550	1400	4	56	30,800
TCS	300	2700	2	54	16,200
INFY	600	1100	2.5	27.5	16,500
ONGC	7700	80.50	2	1.61	12,400
ITC	3200	194	4	7.76	24,832
HINDUNILIVR	300	2125	2	42.5	12,750
BANKNIFTY	25	29150	5	1457.5	36,438
NIFTY	75	12835	2.5	320.875	24,066

Stock, Lot size ,and Current Market Price (CMP) are the data columns. Stop loss percentage comes from your backtesting. Then per share loss is simply multiplication of CMP and Stop Loss (%). For example, for RELIANCE, 1945*0.03 = 58.35/- rs per share. Since one lot of RELIANCE is made up of 505 shares. You will lose 505*58.35 = 29,500/- rs per lot.

So let’s look at the maximum loss by amount in the last column of the table. Thanks about 36,500 rs for Banknifty. We will use this for our risk calculations.

Now comes the next question. How much money as a percentage of your capital can you risk per trade? If your answer is 1%, then 35,000 should correspond to 1% of your capital. That comes to 36,50,000 or 36.5 Lakhs.

Let me illustrate why the textbook answer of “About 15-20L is enough to trade in futures” is harmful for your trading journey. Let us say you jump in with 15L to trade in futures. If you are still willing to risk only 1% per trade, you can only take a loss of up to 15,000/-. So if you spotted a trade in Banknifty, you would be forced to either take the trade with half of your normal stop loss or break your rules and take more risk per trade than you have initially decided. If you keep half of the normal stop loss, the accuracy may reduce. If you take more risk per trade then your account can drawdown more than you had anticipated.

In my personal opinion one should only use futures when one wants to take a short position in a scrip. If you want to go long, you can simply buy the stock. You get the freedom of position sizing. You can add more if you want, you can book your partial profits at first target, you get benefits of corporate actions while you are holding the stock, etc.

I know that indices, currencies and commodities are only traded in futures. But the same risk management principles apply there as well.

Take the same approach we Indians take while packing food for the trip. We usually pack enough for us, our co passengers, the conductor, the driver, the cute dog we see at the rest stop and some more for the return journey. Have enough margin in your account before getting into futures so that even if your every single trade goes wrong in the first month, you can still trade once the calendar turns.

Happy trading…