Risk management and position sizing
The part that keeps you in the game: risk per trade, stop placement, position sizing, reward-to-risk and trading psychology.
1. Why risk comes first
Nobody wins every trade. What separates traders who survive from those who blow up is how much they lose when they are wrong.
| Loss on capital | Gain needed to recover |
|---|---|
| 10% | 11% |
| 25% | 33% |
| 50% | 100% |
| 75% | 300% |
Losses compound against you. Protecting capital is more important than squeezing every rupee out of a winner.
2. Risk per trade
A common rule is to risk no more than 1% to 2% of your trading capital on any single trade. With ₹2,00,000 and 1% risk, your maximum loss per trade is ₹2,000.
At 1% risk, ten losses in a row, which does happen, cost about 10%. At 10% risk, the same streak would cost about two-thirds of the account.
Also set a daily loss limit, for example 3% of capital. When you hit it, stop for the day.
3. Placing stops and sizing positions
Place the stop where your trade idea is clearly wrong: beyond support, beyond resistance, beyond the breakout level. Then size the position so that hitting that stop costs exactly your planned risk.
Position size = rupees at risk ÷ (entry − stop)
Example: ₹2,000 risk, buy at ₹1,500 with stop at ₹1,480. Risk per share is ₹20, so buy 100 shares. For options, divide by (risk per unit × lot size) and round down to whole lots.
Never widen a stop to avoid taking a loss. Moving a stop further away quietly multiplies your risk.
4. Reward-to-risk and win rate
Reward-to-risk compares the distance to your target with the distance to your stop. A 2:1 trade aims to make ₹2 for every ₹1 risked.
| Reward : risk | Win rate needed to break even |
|---|---|
| 1 : 1 | 50% |
| 2 : 1 | 33% |
| 3 : 1 | 25% |
Costs and slippage raise these numbers slightly. A strategy with a low win rate can still work if winners are much bigger than losers; one with a high win rate can still lose if a few losses are huge (typical of naked option selling).
5. Psychology and journaling
- Revenge trading: doubling up after a loss to win it back. The daily loss limit exists to stop this.
- Overtrading: taking weak setups out of boredom. Fewer, better trades usually beat more trades.
- Moving targets: closing winners early and letting losers run. Decide exits before you enter.
Keep a journal of every trade: setup, entry, stop, target, result and what you felt. Review it weekly. Patterns in your own behaviour are often the biggest edge you can find.
Key takeaways
- Risk 1% to 2% of capital per trade and set a daily loss limit.
- Stop first, then size: position = rupees at risk ÷ risk per unit.
- Reward-to-risk and win rate together decide whether a strategy can work.
- Journal every trade and review it; discipline is a skill you can measure.
Try it on ExpertView: Work out your position size →
From ExpertView's free courses at expertview.in/learn. For study and educational use. Not investment advice. Rules, lot sizes, taxes and timings change; check the latest from NSE, MCX, SEBI and the Income Tax Department.