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!
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%?
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).
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?
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!
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.
Always keep in mind,
"Wisdom Yields Wealth"