Dear Readers,

What is risk management? How much risk should you take on a single trade?

What are its benefits? Let’s discuss something that is rarely talked about!

There is no reward without risk. Whether you are an investor or a trader, calculating this correctly is essential.

What is risk management?

Let’s assume you are buying a stock for a swing trade. If your investment amount is ₹1,00,000, it refers to the maximum risk you are willing to take on that amount.

To put it simply, it is the amount you are prepared to lose if the trade moves against you.

How much should that be? Personally, regardless of the size of the investment, I never risk more than 2%.

The maximum loss would be of Rs 2000 for an investment of Rs 1,00,000.

The benefits are: If the trade moves against you, your loss is capped at a maximum of 2%; this would ensure the capital doesn't deplete significantly.

You can have the the opportunity to retain the trade effectively again and again.

Most importantly, you can trade with confidence, free from anxiety or fear.

Crucially, your capital remains largely intact.

How do you calculate this?

Let me explain this simply using options buying. Let’s assume you have an investment of ₹1 lakh.
In Nifty options, one lot consists of 65 units. Let’s assume the 24000 Put option is trading at ₹200.
The total investment for this trade would be ₹13,000. You need to set a stop-loss for this?

If you set a stop-loss if the order price drops by ₹20, your loss for this will only be ₹1,300.
This represent just 1.3% of your total investment of ₹1,00,000.

However, if the trade get succeeded, you will have a gain of ₹1,300 at a 1:1 ratio, that is ₹2,600 at 1:2, and ₹3,900 at 1:3.

Yes, this is depending on the day's market movement, you could earn a profit of 1.3%, 2.6%, or 3.9% on your investment.
By making a 10% profit in a month this way, your account will grow steadily.
You must always strive for consistency and never break your discipline in the trading.
This is what risk management is all about.

If you calculate the entry, exit, and stop-loss points before executing a trade, you will be able to trade successfully in the long run.
Since the potential loss is low, you can trade fearlessly using your setup; even if you execute 10 trades, the maximum loss would only be ₹13,000.
If you maintain a 1:3 reward ratio, you would remain profitable even if only 5 of those 10 trades succeed.

First, clearly understand the risks involved in trading. Taking excessive risks means you will only trade repeatedly to recover lost capital rather than growing your account.

Instead, your capital will gradually erode, much like a melting candle.

The investors often recover their losses over the long term through patience and waiting, whereas traders tend to make all the wrong moves.

I plan to write more awareness posts for traders from now on!

Have a great time ahead in the markets!