Decide the Risk Before the Trade
Most large losses come from trades where the risk was never defined. A common educational guideline is to risk only a small fixed percentage of total capital on any single trade. If your capital is 5,00,000 and you accept a 1% risk, the maximum planned loss on one trade is 5,000, whatever the setup looks like.
How Position Size Is Calculated
Position size follows from risk, not from conviction. Divide the amount you are willing to lose by the distance between your entry and your stop-loss. If the planned loss is 5,000 and the stop-loss is 10 rupees away from entry, the position is 500 shares. A wider stop means a smaller position; a tighter stop allows a larger one.
Placing a Stop-Loss That Makes Sense
- Base it on a market level such as a recent swing low or support zone, not on a number you can tolerate emotionally.
- Account for normal volatility so routine movement does not trigger it.
- Do not move a stop-loss further away after entry to avoid taking a loss.
Add a Daily and Weekly Loss Limit
A daily loss limit tells you when to stop for the day. Many traders lose more after a string of losses because they trade to recover. Writing the rule in advance, for example stopping after a 2% capital loss in a day, removes the decision from an emotional moment.
Remember the Limits
Risk rules reduce the damage of a bad outcome; they do not remove risk. Gaps, slippage and volatility can cause losses larger than planned, and derivatives involve additional risk. This article is educational and is not a recommendation to buy or sell any security.
