Playing nifty one lot per lakh and making 100 points a month, i.e 1200 points a year, can make us 50*1200 = 60,000/- per annum with 1 Lac of capital. So basically, we can get 60% return per annum with just 100 points per month on an average basis.
if we compound the capital year on year, the Capital can grow 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 return. But in real trading, we face the following challenges:
1) Pulling the Trigger – When Capital starts increasing, to compound, we have to increase the quantity too, but the larger the quantity, the more difficult it is to pull the trigger for taking all the trades generated by the system. The situation gets worse when there is a streak of losses.
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 average 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 the bigger the size we have, the larger 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 less slippage.
But it takes a lot of time to change the mindset from intraday to Swing or positional. So, if we are serious about this profession in the long term, we should start conditioning our minds 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 the 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 capital 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.
Source: https://rideniftywithshahi.blogspot.com/2013/09/power-of-compouding.html