Intermediate · 8 min read

Risk management and position sizing

Deciding how much you can lose before you place a trade: risk per trade, stops, trailing stops and reward-to-risk.

Most trading mistakes are risk mistakes, not prediction mistakes. Risk management means deciding in advance how much you are willing to lose, and sizing the position so that a loss stays within that number.

Risk per trade

Many traders limit the loss on any single trade to a small percentage of capital; 1% to 2% is a commonly quoted rule of thumb. It is a convention, not a recommendation, and it exists so that a string of losses does not end your account. Use the Calculator tab to turn a risk amount and a stop distance into a position size.

Stop-loss and trailing stop

• A stop-loss is a predefined exit price (or loss amount) at which the position is closed.
• A trailing stop-loss follows the price in your favour and never moves back, so it can lock in part of a gain.
• A stop is not a guarantee: in fast markets or gaps the actual exit can be worse than the stop price.

Reward-to-risk and win rate

If you risk ₹1,000 to make ₹2,000 (reward-to-risk 2), you need to win only about one trade in three to break even before costs. If you risk ₹2,000 to make ₹1,000, you need to win about two in three. Win rate and reward-to-risk must be read together; expectancy combines them: (win rate × average win) − (loss rate × average loss).

Defined risk vs. open risk

Structures with a capped maximum loss let you size by the worst case. Structures with open-ended risk (naked short options) need a stop rule you will actually follow, and much smaller size.

Caution. Never size a trade by how much you hope to make. Size it by how much you can afford to lose.