Traders who last are rarely the ones with the best entries. They are the ones who never let a single trade, or a single bad week, do serious damage to their capital. Risk management is the set of rules that makes that possible.
Risk is decided before you enter
Before placing any order, answer three questions: where is my idea proven wrong, how much will I lose if that happens, and is that loss acceptable? If you cannot answer the first one, you do not have a trade yet.
Choose a fixed risk per trade
Many traders limit the amount they can lose on any single trade to a small percentage of their trading capital, often somewhere around 1% to 2%. This is a common rule of thumb, not advice, and the right figure depends on you. The point is that the number is fixed in advance and does not grow when you feel confident.
How to calculate position size
Position size comes from your stop-loss, not from how much money you want to put in.
- Risk amount = trading capital x risk percentage
- Risk per share = entry price - stop-loss price
- Quantity = risk amount / risk per share
Example (illustrative only): capital of ₹1,00,000 and a 1% risk rule gives a risk amount of ₹1,000. If you plan to buy at ₹200 with a stop-loss at ₹190, the risk per share is ₹10, so the quantity is 100 shares. If the stop-loss is hit you lose about ₹1,000, which is exactly what you planned.
Understand risk-to-reward
Risk-to-reward compares what you stand to lose with what you hope to gain. If you risk ₹1,000 to make ₹2,000, the ratio is 1:2. A strategy that wins only 40% of the time can still be workable with a healthy ratio, while a strategy that wins 70% of the time can still lose money if the losses are much larger than the gains. Track both numbers in your trading journal.
Use a daily and weekly loss limit
A single bad day should not turn into a bad month. Decide a maximum daily loss, and when it is reached, stop trading until the next session. This single rule prevents most revenge trading.
Habits that quietly destroy accounts
- Moving a stop-loss further away because the trade is going against you
- Adding to a losing position to lower your average price
- Using leverage you do not fully understand
- Increasing size after a winning streak
Put it into practice
Write your risk rules on one page and keep it in front of you while you trade. Review them every weekend. If you want guided practice, explore our courses. This article is for education only; it is not a recommendation to buy or sell anything.