PART 4 : Risk Management

The majority of short-term trading results are just random. In the long term the money ends up with those that can trade and manage risk.

Why Risk Management is Important?

People who don’t follow Risk Management they can blowout their account easily.
For instance, they are taking 20 % risk of trading capital, then only 5 wrong trade can blow their account.

The 1 % Rule

Let’s say you have 10,000 rs in your account and as per 1% rule you can lose only 100 rs per trade.
For example, if you take 10 trade with 1:2 Risk Reward ratio and having winning percentage of 50 % then your P&L will be look like this.

1st trade: +200
2nd trade: +200
3rd trade: -100
4th trade: +200
5th trade: +200
6th trade: +200
7th trade: -100
8th trade: -100
9th trade: -100
10th trade: -100

Total P&L: +500

At the end of the day, you will take money in your account with proper risk reward ratio and money management.

Position Size Calculation:

Let’s say you want to long Reliance and having Stop Loss of 5rs with trading capital is 10,000 rs . So, Formula is

Position Size = (1% of Trading Capital) / (Stop Loss)

For our trade example, Position Size is = 100/5 = 20 Qty
Hence, we required 20 Qty to trade Reliance with 100 rs as a stop loss.

To conclude this post, trader should have (Min Loss, Max Profit, Breakeven). Whereas, Max Loss should be avoided to remain in trading career for long term.
Please check my Fibo Trading Strategy post to know more about Stop loss, I will link with this post.