I would like to understand a scenario. Suppose I allocate a maximum capital of ₹5 lakhs to an algo strategy. Initially, the algo utilizes ₹1.5 lakhs for trading. Due to drawdowns, the overall capital reduces to ₹3 lakhs. In this situation, will the algo continue trading with the same ₹1.5 lakhs allocation, reduce its position sizes based on the remaining capital, or stop taking new positions altogether? How does this typically work in most algo strategies?
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Yes would like to know.
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Hello @MAHESWARA_REDDY
If you allocate ₹5 lakhs to an algo, your demat account should also have at least ₹5 lakhs available. If the strategy incurs a drawdown of ₹50,000, your available funds reduce to ₹4.5 lakhs, which is below the allocated capital. In such a scenario, the algo will not take any new trades until the available funds are restored to the required level.
To avoid interruptions in trading due to mark-to-market (MTM) losses, we recommend keeping an additional 15%–20% capital buffer over and above your allocated capital.
For example:
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Allocated Capital: ₹5,00,000
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Recommended Buffer: ₹75,000–₹1,00,000
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Total Funds in Demat Account: ₹5.75–₹6.00 lakhs
This additional buffer helps absorb temporary MTM losses, allowing the algo to continue trading smoothly without being paused due to insufficient funds.
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