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How many contracts should you buy when trading the ALMI?

by , 20 March 2014

"Hi Timon, How many contracts should I buy if I have a portfolio of R20,000, when trading the ALMI?" - L.Y

If you don't know the answer to this question, then don't trade another ALMI until you've read this!

There are many different ways to calculate how many contracts you should buy or sell with any one ALMI trade.

But, let me explain to you what I find the easiest…

How to figure out how many ALMI contracts to hold

Hold over R42,000 and only pay 1/15th of the price!

You first need to know what the ALSI 40 index is, to understand the ALMI better.

You see, the ALSI is a futures contract that represents the Top 40 companies, listed on the JSE, ranked by the full market value. If you buy one contract you get exposure to R42,000 worth of shares. And, depending on what broker you’re dealing with, you’ll pay have to put down R28,420 for one ALSI contract.

This amount is called the margin amount and is similar to a deposit.

But R28,420 is still a lot of money, that's why the ALMI was created.

It was was designed to make trading more accessible to retail investors and traders. 

You see, one ALMI is a 1/10th of one ALSI futures contract. and you’ll only pay 1/15th of the price for one ALSI contract which is around  R2,842 per ALMI contract… and you'll get exposure to R42,000 worth of shares.

So you can clearly see, you don’t need much to trade the ALMI!

This rule can help you decide how many contracts you should buy!

To explain this better, here’s an example.

Let’s say you go long (buy) one ALMI contract.

Here are the specifics for the ALMI trade:

Entry level: 42,400
Stop Loss: 42,000

Now when I trade, in general, I’ll never risk more than 2% of my portfolio per trade. So if you have a portfolio value of R20,000, then you should only look to risk R400 (2% X R20,000), in any one ALMI trade.

Note: The "2% rule" is a general guideline I use and so, you may choose the percentage you are willing to risk per ALMI trade.

Now the question is, how do you know the maximum amount of ALMI contracts you can trade and never risk more than 2%?

You just need two steps to calculate how many ALMI contracts you’ll buy!

Step #1: Calculate the points risked per contract

This is where you’ll take your entry level (42,400 points) and subtract your stop loss level (42,000).

Points risked per trade = (Entry level – Stop loss level)
                                           = (42,400 – 42,000)
                                           = 400 points

Before I carry on, you need to know this.

When you buy one ALMI contract, you’ll essentially risk R1 for every one point that goes for or against you…

So if you bought one ALMI contract in this trade means, you’ll risk R400 per trade (400 Points X R1 risk per point).

Step #2: Calculate how many ALMI contracts you should buy!

All you do now, is simply take the maximum loss that you’re willing to take on your ALMI trade, which is R400, and divide it by the points
that you’ll risk per trade (400 points).

No. of contracts per ALMI trade:
                                        = (Max loss in Rands per trade ÷ Points risked per trade)
                                        = (R400 ÷ 400 points)
                                        = 1 ALMI contract.

So if you want to only risk 2% of your portfolio in an ALMI trade, then you’ll buy one ALMI contract in this specific trade.

What if you calculate that you’ll risk more than what you can afford to lose?

Don’t worry!

Here are three options you can take to manage your risk and trade the ALMI at the same time no matter what your portfolio is!

  • Option #1: Add more funds to your portfolio so you’ll be able to manage the % rule per ALMI trade.
  • Option #2: Raise your stop loss so that you’ll risk less points in the trade than what you wanted to risk. So if you have a R10,000 portfolio and you only want to risk 2% then you’ll only risk 200 points per ALMI trade, once you've moved your stop loss up.
  • Option #3: You can actually trade an alternative instrument called the SATRX 40 CFD .

Note: You might not get exactly the same returns, because it’s a different instrument, but you’ll definitely be able to handle your risk management better. And you'll be able to profit from the moves of the Top 40 shares!

I’ve made your life even easier and created a tool for you

This ALMI risk calculator tool will do all of the calculations for you, which can get you to buy and sell ALMI contracts, in less time than previously needed.

ALMI, Risk calculator, Timon Rossolimos

So, simply click here for your free ALMI risk calculator tool...

Always keep in mind, 

"Wisdom Yields Wealth"

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