Power Of Compounding

Playing nifty one lot per lakh and making 100 points a month, i.e 1200 points an year can make us 50*1200 = 60,000/- per anum with 1 Lac of capital. So basically we can get 60% return per anum with just 100 points per month on average basis.

if we compound the capital year on year, Captial can be grown to 10 times in five years.

Total capital after 5 years = Starting capital * (1.6)^5 =  Starting capital * 10.48

On paper it looks very easy to achieve 100 points per month and get this kind of returns. But in real trading we face the below challenges:

1) Pulling the Trigger - When Capital starts increasing , in order to compound we have to increase the quantity too but the larger is the quantity, more difficult is to pull the trigger for taking all the trades generated by the system. The situation gets worse when there is a streak of loss.

2) Slippage Issue- If today we buy one lot of nifty at market order , we may not get any slippage problem, But if we buy 100 lots at market order, it can cost us 3-4 points of slippage. So if one has an intraday strategy of making 5 avg points every day(5*20 =100 points per month), the strategy will stop working if he has to scale-up his size to 100 lots. So bigger the size we have, the larger should be the time frame for trading if we really want to compound the capital. Larger time frame trading will reduce the frequency of the trades which will result in lesser slippage.

But it takes a lot of time to change mindset of intraday to Swing or positional . So If we are serious about this profession for a long term, we should start conditioning our mind at an early stage for larger time frames rather than day trading with smaller time frames.

Since we are talking of compounding capital, all of our hard earned money is always exposed to market and one big blow to our account can also damage our account badly. So Leverage has to be controlled from the first day. I prefer to play one lot per lakh, but once the captial reaches to a respectable amount, we can reduce the leverage even further and can start playing one lot per 1.5 lac or 2 lac.

Please share your insights in comments.