Position Sizing and Risk Management#
Risk management is the difference between surviving and thriving in the markets. No strategy works without proper risk control.
The 1% Rule#
Never risk more than 1-2% of your total capital on a single trade.
Example:#
- Capital: ₹5,00,000
- Max risk per trade (1%): ₹5,000
- Entry: ₹100, Stop-loss: ₹95 (risk = ₹5/share)
- Position size: ₹5,000 ÷ ₹5 = 1,000 shares
Formula:#
Position Size = (Capital × Risk%) / (Entry - Stop-Loss)
Risk-Reward Ratio#
The minimum acceptable risk-reward should be 1:2.
| Risk:Reward | Win Rate Needed to Break Even |
|---|---|
| 1:1 | 50% |
| 1:2 | 33% |
| 1:3 | 25% |
Even with 40% win rate, a 1:2 RR is profitable!
Portfolio Risk Rules#
- Total portfolio risk: Max 5-6% at any time
- Correlated positions: Don't overload in one sector
- Maximum positions: 5-8 active trades for swing
- Daily loss limit (intraday): 3% of capital, then stop
Types of Stop-Losses#
- Fixed SL: Set at entry, don't move it wider
- Trailing SL: Move SL in profit direction as trade moves
- Time-based SL: Exit if trade doesn't move in X days
- Volatility SL: Based on ATR (Average True Range)
ATR-Based Stop-Loss#
- Calculate 14-period ATR
- Place SL at: Entry ± (1.5 × ATR)
- Adapts to each stock's volatility automatically
Common Risk Management Mistakes#
- ❌ Averaging down on losing positions
- ❌ Moving stop-loss further from entry
- ❌ Risking 10%+ on a single "sure thing"
- ❌ No stop-loss at all
- ❌ Revenge trading after a loss
- ✅ Accept small losses as cost of business
- ✅ Let winners run, cut losers quickly
- ✅ Follow the plan, not emotions