How High Brokerage Can Kill You in F&O

If you are a trader in Nifty futures, who wants to double his capital by intraday trading within 1 year, then see the calculation below and see why a low brokerage is absolutely MUST to achieve this aim.

Who - Traders in Nifty Futures
Aim - Double a Capital of 1 lac in 1 year
How - Trade in Nifty Futures on Intraday Basis

With a Capital of Rs. 1 lac, you should be able to trade in 4 lots of Nifty Futures at current rates. To double your money, you actually need to earn 500 Nifty Points, if you are trading with Nifty Futures. To do that, you have approximately 220 trading days. Lets assume you trade on a Daily Basis and Intraday only. Hence, you need to earn 500/220 = approximately 2 points per trade. Easy? Now look at the calculations below:

Total No. of trades = 250 (for ease of calcuation)
No. of Points earned = 500
Total money earned on 4 lots = Rs. 1,00,000
Brokerage per lot = Rs.150-250 per lot
Total Brokerage per day for 4 lots = Rs. 600 to Rs. 1000
Total brokerage for the entire year = Rs. 1,50,000 to Rs. 2,50,000

Net Profit - Brokerage = Rs. 50,000 to Rs. 1,50,0000 LOSS

Now one can argue that by trading in Nifty Futures, 500 points can be achieved in half of that time. Lets assume that you can achieve this target in 6 months, instead of 1 year. This is a pretty aggressive assumption, because if this is true, you can potentially double your capital every 6 months. Still, lets go ahead with this calculation:

Total No. of trades = 125
No. of Points earned = 500
Total money earned on 4 lots = Rs. 1,00,000
Brokerage per lot = Rs.150-250 per lot
Total Brokerage per day for 4 lots = Rs. 600 to Rs. 1000
Total brokerage for the entire year = Rs. 75,000 to Rs. 1,50,000

Net Profit - Brokerage = Rs. 25,000 PROFIT OR Rs.50,0000 LOSS

Hence, we see that with a brokerage of Rs. 150-250, which is the prevailing rates for most brokerages as of now in India, it is next to impossible to generate consistent returns from the market by Intraday Trading.

If YOU still want to trade, find out a brokerage which will charge you less than Rs. 20/lot in Nifty Futures.Or else, negotiate with your Broker to offer you Low Brokerage. If he refuses, better to STOP trading with him, rather than making him rich, while you become poor. It is only when these brokers start losing clients, will they think of their benefit first rather than theirs. A reduced brokerage is a win-win situation for both the Brokers and the Clients, as if the client makes money, the Broker will keep getting a regular and predictable income from him. However, in present situation, majority of traders Stop trading after losing their capital by paying high brokerage fees.

Similar calculation can be shown to be true for Nifty Options Traders and other Intraday Traders. But that is for later.