2 posts tagged with "capital preservation"

One rule. One number. One decision.

2%

That's all you need to know to protect your trading account.

Let me show you why this simple rule is the difference between survival and destruction.

What Is the 2% Rule?​

The 2% Rule: Never risk more than 2% of your account on a single trade.

That's it.

Not 3%. Not 5%. Not 10%.

2%.

The Math​

Account: ₹5,00,000
2% Risk: ₹10,000 per trade
Stop Loss: ₹50 away
Position Size: ₹10,000 ÷ ₹50 = 200 shares

If stopped out: Lose exactly ₹10,000 (2%)
Account remaining: ₹4,90,000 (98%)

Why 2%? Why Not More?​

The Survival Math​

Let's see what happens with different risk levels:

Scenario: 10-Loss Streak (happens to everyone)​

At 2% risk per trade:

• Loss 1: ₹5,00,000 → ₹4,90,000 (-2%)
• Loss 2: ₹4,90,000 → ₹4,80,200 (-2%)
• Loss 3: ₹4,80,200 → ₹4,70,596 (-2%)
• ...
• Loss 10: ₹4,08,000 → ₹3,99,840 (-2%)
• Total loss: 20%
• Account survives

At 5% risk per trade:

• Loss 1: ₹5,00,000 → ₹4,75,000 (-5%)
• Loss 2: ₹4,75,000 → ₹4,51,250 (-5%)
• Loss 3: ₹4,51,250 → ₹4,28,688 (-5%)
• ...
• Loss 10: ₹2,99,000 → ₹2,84,000 (-5%)
• Total loss: 43%
• Account damaged

At 10% risk per trade:

• Loss 1: ₹5,00,000 → ₹4,50,000 (-10%)
• Loss 2: ₹4,50,000 → ₹4,05,000 (-10%)
• Loss 3: ₹4,05,000 → ₹3,64,500 (-10%)
• ...
• Loss 10: ₹1,95,000 → ₹1,75,000 (-10%)
• Total loss: 65%
• Account devastated

The Recovery Math​

How much do you need to recover?

After 20% loss (2% rule):

• Need +25% to recover
• Achievable with good trading

After 43% loss (5% rule):

• Need +75% to recover
• Very difficult

After 65% loss (10% rule):

• Need +186% to recover
• Nearly impossible

The 2% rule keeps you in the game.

Real Examples​

Example 1: Equity Trading​

Setup:

• Account: ₹3,00,000
• Stock: RELIANCE
• Entry: ₹2,500
• Stop: ₹2,450 (₹50 away)

2% Calculation:

• Risk amount: ₹3,00,000 × 2% = ₹6,000
• Position size: ₹6,000 ÷ ₹50 = 120 shares
• Investment: 120 × ₹2,500 = ₹3,00,000
• Risk: 120 × ₹50 = ₹6,000 ✓

If stopped out: Lose ₹6,000 (exactly 2%)

Example 2: Options Trading​

Setup:

• Account: ₹5,00,000
• NIFTY 24500 CE @ ₹150
• Stop: ₹120 (₹30 away)
• Lot size: 50

2% Calculation:

• Risk amount: ₹5,00,000 × 2% = ₹10,000
• Position size: ₹10,000 ÷ (₹30 × 50) = 6.67 lots
• Round down: 6 lots
• Investment: 6 × 50 × ₹150 = ₹45,000
• Risk: 6 × 50 × ₹30 = ₹9,000 ✓

If stopped out: Lose ₹9,000 (1.8% - even safer)

Example 3: Futures Trading​

Setup:

• Account: ₹10,00,000
• NIFTY Futures @ 24,500
• Stop: 24,400 (100 points)
• Lot size: 50

2% Calculation:

• Risk amount: ₹10,00,000 × 2% = ₹20,000
• Position size: ₹20,000 ÷ (100 × 50) = 4 lots
• Investment: 4 × 50 × 24,500 = ₹49,00,000
• Margin required: ~₹2,45,000
• Risk: 4 × 50 × 100 = ₹20,000 ✓

If stopped out: Lose ₹20,000 (exactly 2%)

Common Objections to the 2% Rule​

Objection #1: "2% Is Too Small"​

"I need bigger positions to make money"

Reality check:

• 2% × 20 trades = 40% of account at risk
• If you win 60% of trades, you're profitable
• Compounding works over time

Example:

• Start: ₹5,00,000
• Win 60% of trades (2% each)
• After 100 trades: ₹8,50,000
• 70% growth with 2% risk

Objection #2: "I'm Confident This Will Work"​

"This trade is 100% sure"

Reality:

• No trade is 100% sure
• Even 80% probability trades lose 20% of time
• Confidence ≠ accuracy

Better approach:

• Trade with 2% risk
• If you're right, you make money
• If you're wrong, you survive

Objection #3: "I Need to Make Money Fast"​

"I can't wait for slow growth"

Reality:

• Fast money = Fast losses
• Slow money = Sustainable money
• Surviving > Thriving

Math:

• 2% risk: Survive losing streaks
• 10% risk: Blow up account
• Dead traders make 0%

Objection #4: "My Account Is Too Small"​

"₹50,000 account, 2% = ₹1,000, too small"

Solutions:

1. Build account first (paper trade)
2. Use 2% of larger amount (₹1,00,000 = ₹2,000)
3. Accept smaller positions (better than blowing up)

Remember: Small account + big risk = No account

Advanced: When to Use Less Than 2%​

Use 1% When:​

High volatility markets:

• VIX > 20
• Earnings season
• Major news events

Testing new strategies:

• First 20 trades
• Unfamiliar instruments
• Different timeframes

After losses:

• Recent losing streak
• Emotional state compromised
• Account drawdown > 10%

Use 0.5% When:​

Account < ₹1,00,000:

• Preserve capital
• Learn without risk
• Build confidence

Very volatile instruments:

• Penny stocks
• Cryptocurrency
• High-beta stocks

The 2% Rule in Practice​

Daily Implementation​

Before every trade:

1. Calculate 2% of account
2. Determine stop loss distance
3. Calculate position size
4. Verify: Risk ≤ 2%
5. Enter trade

Example checklist:

Account: ₹5,00,000
2% Risk: ₹10,000
Entry: ₹1,000
Stop: ₹980 (₹20 away)
Position Size: ₹10,000 ÷ ₹20 = 500 shares
Investment: 500 × ₹1,000 = ₹5,00,000
Risk: 500 × ₹20 = ₹10,000 ✓

Weekly Review​

Check:

• Did I follow 2% rule every trade?
• What was my average risk per trade?
• Any trades exceeded 2%?

If yes: Why? How to prevent?

Monthly Analysis​

Track:

• Total risk taken
• Number of 2%+ trades
• Correlation with losses

Goal: 100% adherence to 2% rule

Portfolio Heat: Multiple Positions​

The Problem​

You have 3 open positions:

• Position 1: 2% risk
• Position 2: 2% risk
• Position 3: 2% risk
• Total portfolio heat: 6%

This is acceptable.

The Danger Zone​

You have 5 open positions:

• Each: 2% risk
• Total portfolio heat: 10%

This is dangerous.

Safe Portfolio Heat Levels​

Rule: Keep total portfolio heat below 6-8%

The 2% Rule Calculator​

Formula​

Position Size = (Account Size × 2%) ÷ Stop Loss Distance

Example:
Account: ₹5,00,000
2% Risk: ₹10,000
Stop Distance: ₹50
Position Size: ₹10,000 ÷ ₹50 = 200 shares

TradeLyser Integration​

Auto-calculation:

1. Enter account size
2. Enter entry price
3. Enter stop price
4. TradeLyser calculates position size
5. Shows risk percentage
6. Alerts if > 2%

No math required. No errors possible.

Real Results: Before & After​

Trader A: No Risk Management​

Before 2% rule:

• Risk per trade: 5-10%
• Account: ₹5,00,000
• After 5 losses: ₹2,50,000 (-50%)
• Emotional state: Devastated
• Trading: Stopped

Trader B: With 2% Rule​

After implementing 2% rule:

• Risk per trade: 2%
• Account: ₹5,00,000
• After 5 losses: ₹4,50,000 (-10%)
• Emotional state: Calm
• Trading: Continued

Same strategy. Different risk management. Different outcome.

The Psychology of 2%​

Why It Works​

Small losses:

• Don't hurt emotionally
• Don't affect confidence
• Don't trigger revenge trading
• Allow continued trading

Large losses:

• Devastate emotionally
• Destroy confidence
• Trigger revenge trading
• Stop trading

The Compound Effect​

Month 1: Follow 2% rule
Month 2: Still following (habit formed)
Month 3: Automatic (no thinking required)
Month 6: Different trader (disciplined)
Month 12: Profitable trader (survived to learn)

Common Mistakes​

Mistake #1: "Just This Once"​

"This trade is special, I'll risk 5%"

Problem: Once becomes always

Solution: Never exceed 2%. Ever.

Mistake #2: Moving Stops​

"I'll widen the stop to 3% risk"

Problem: Defeats the purpose

Solution: Set stop first, then calculate position

Mistake #3: Averaging Down​

"I'll add to losing position"

Problem: Increases risk beyond 2%

Solution: One position per trade

Mistake #4: No Stop Loss​

"I'll hold until it comes back"

Problem: Risk becomes unlimited

Solution: Always set stop before entry

The Bottom Line​

The 2% rule isn't about making money.

It's about staying alive.

You can't make money if you're not trading.

You can't trade if you blow up your account.

The 2% rule ensures you survive to trade another day.

Simple. Powerful. Essential.

Take Action Now​

Today:

1. Calculate 2% of your account
2. Write it down where you trade
3. Use it for your next trade

This Week:

1. Follow 2% rule for every trade
2. Track adherence (should be 100%)
3. Notice how losses feel smaller

This Month:

1. Review: Did I follow 2% rule?
2. Calculate: Money saved by small losses
3. Compare: Before vs after emotional state

👉 Use TradeLyser Position Size Calculator
👉 Download: 2% Rule Calculator
👉 Next: Breakout Trading in Indian Markets

Do you follow the 2% rule? What's your biggest risk management challenge? Share below.

Pop quiz: What's the most important factor in long-term trading success?

• Strategy? ❌
• Win rate? ❌
• Risk:reward? ❌

Answer: Position sizing.

You can have the best strategy in the world, but if you size positions incorrectly, you'll blow up your account.

Let me show you why—and exactly how to size positions like a professional.

The Brutal Math of Trading​

Consider two traders with identical strategies:

Trader A: Poor Position Sizing​

• Win Rate: 60%
• Avg Win: ₹5,000
• Avg Loss: ₹5,000
• But: Risks 20% per trade

Trader B: Smart Position Sizing​

• Win Rate: 60%
• Avg Win: ₹5,000
• Avg Loss: ₹5,000
• Risks 2% per trade

Who survives?

After hitting 3 losses in a row (which happens to all traders):

Trader A:

• Loss 1: -20% (₹1,00,000 → ₹80,000)
• Loss 2: -20% (₹80,000 → ₹64,000)
• Loss 3: -20% (₹64,000 → ₹51,200)
• Total: -48.8%
• Needs +95% to recover

Trader B:

• Loss 1: -2% (₹1,00,000 → ₹98,000)
• Loss 2: -2% (₹98,000 → ₹96,040)
• Loss 3: -2% (₹96,040 → ₹94,119)
• Total: -5.9%
• Needs +6.3% to recover

See the difference? Same strategy. Massively different outcomes.

What Is Position Sizing?​

Position sizing answers one question:

"How much should I risk on this trade?"

Not: "How many shares should I buy?"
Not: "How much can I afford?"
But: "How much am I willing to lose if I'm wrong?"

The Fixed Percentage Method​

Rule: Risk a fixed percentage of your capital per trade.

Standard Risk Levels:​

Most pros use 1-2% per trade.

The Formula:​

Position Size = (Account Size × Risk %) / Stop Loss Distance

Example:
Account: ₹5,00,000
Risk: 2% = ₹10,000
Entry: ₹1,000
Stop: ₹980 (20 points away)

Position Size = ₹10,000 / ₹20 = 500 shares

If stopped out: Lose exactly ₹10,000 (2%)

Real Examples​

Example 1: Equity Trade​

Setup:

• Account: ₹3,00,000
• Risk: 1% = ₹3,000
• Stock: RELIANCE
• Entry: ₹2,500
• Stop: ₹2,450 (₹50 away)

Calculation:

Position Size = ₹3,000 / ₹50 = 60 shares

Investment: 60 × ₹2,500 = ₹1,50,000
Risk: 60 × ₹50 = ₹3,000 ✓

Example 2: Options Trade​

Setup:

• Account: ₹5,00,000
• Risk: 2% = ₹10,000
• NIFTY 24500 CE @ ₹150
• Stop: ₹120 (₹30 away)
• Lot size: 50

Calculation:

Position Size = ₹10,000 / (₹30 × 50)
= ₹10,000 / ₹1,500
= 6.67 lots
= 6 lots (round down)

Investment: 6 lots × 50 × ₹150 = ₹45,000
Risk: 6 lots × 50 × ₹30 = ₹9,000 ✓

Example 3: Futures Trade​

Setup:

• Account: ₹10,00,000
• Risk: 1.5% = ₹15,000
• NIFTY Futures @ 24,500
• Stop: 24,400 (100 points)
• Lot size: 50

Calculation:

Position Size = ₹15,000 / (100 × 50)
= ₹15,000 / ₹5,000
= 3 lots

Investment: 3 lots × 50 × 24,500 = ₹36,75,000
(Margin required: ~₹1,80,000)
Risk: 3 lots × 50 × 100 = ₹15,000 ✓

Advanced Position Sizing Strategies​

1. Kelly Criterion​

Mathematical formula to maximize long-term growth:

Kelly % = (Win Rate × Avg Win - (1 - Win Rate) × Avg Loss) / Avg Win

Example:
Win Rate: 60%
Avg Win: ₹5,000
Avg Loss: ₹3,000

Kelly = (0.6 × 5000 - 0.4 × 3000) / 5000
     = (3000 - 1200) / 5000
     = 0.36 = 36%

Problem: 36% is too aggressive for most traders.

Solution: Use Half Kelly or Quarter Kelly

Half Kelly = 18%
Quarter Kelly = 9%

Recommendation: Start with Quarter Kelly, max Half Kelly.

2. Volatility-Adjusted Sizing​

Adjust position size based on market volatility:

Position Size = Base Size × (Normal VIX / Current VIX)

Example:
Normal VIX: 15
Current VIX: 20
Base position: 2%

Adjusted = 2% × (15/20) = 1.5%

Result: Automatically reduce size in high volatility.

3. Confidence-Based Sizing​

Scale position size based on setup quality:

Example:

• A+ setup with all conditions: 2% risk
• A setup with most conditions: 1.5% risk
• Marginal setup: Skip it

4. Pyramid Scaling​

Add to winning positions:

Initial position: 1%
After +50% of target: Add 0.5%
After +75% of target: Add 0.25%

Total risk: 1.75% (but averaged price is better)

Rule: Always trail stops on entire position.

Position Sizing Mistakes to Avoid​

❌ Mistake #1: Fixed Share Quantity​

Wrong: "I always buy 100 shares"

Why wrong: 100 shares of ₹50 stock = ₹5,000
100 shares of ₹2,500 stock = ₹2,50,000

Fix: Calculate position size based on risk.

❌ Mistake #2: Using All Available Capital​

Wrong: "I have ₹1L, so I'll use it all"

Why wrong: One bad trade = 100% loss

Fix: Never use more than 10-20% of capital per trade.

❌ Mistake #3: Ignoring Stop Loss​

Wrong: "I'll buy ₹1L worth and hope"

Why wrong: No defined risk = no position sizing

Fix: Always set stop before calculating position size.

❌ Mistake #4: Revenge Sizing​

Wrong: "I lost ₹10K, so I'll risk ₹20K to win it back"

Why wrong: Doubling risk doubles ruin probability

Fix: Stick to your % rule, especially after losses.

❌ Mistake #5: Over-Leveraging​

Wrong: "I'll use 10x leverage because I'm confident"

Why wrong: Confidence doesn't reduce risk

Fix: Higher leverage = smaller position size.

Portfolio Heat: Managing Multiple Positions​

Portfolio Heat = Total risk across all open positions

Example:​

Trade 1: 2% risk
Trade 2: 2% risk
Trade 3: 1.5% risk

Total Portfolio Heat: 5.5%

Safe Portfolio Heat Levels:​

Rule: Keep portfolio heat below 6-8% maximum.

Position Sizing for Different Account Sizes​

Small Account (₹50,000 - ₹2,00,000)​

Challenges:

• Lot sizes too large
• Limited diversification
• High percentage swings

Strategy:

• Focus on equity (not F&O)
• 2-3% risk per trade
• Maximum 2-3 positions
• Accept concentration risk

Medium Account (₹2,00,000 - ₹10,00,000)​

Advantages:

• Can trade F&O
• Some diversification possible
• More flexibility

Strategy:

• 1.5-2% risk per trade
• Maximum 3-4 positions
• Mix of equity and F&O
• Portfolio heat: 6% max

Large Account (₹10,00,000+)​

Advantages:

• Full diversification
• Multiple strategies
• Professional management possible

Strategy:

• 0.5-1% risk per trade
• Multiple positions (5-10)
• Different strategies
• Portfolio heat: 5% max

The Math of Survival​

Question: How many losses in a row can you survive?

At 1% risk per trade:​

1. -1% → 99% remaining
2. -1% → 98.01% remaining
3. -1% → 97.03% remaining ... 10 losses: 90.44% remaining 20 losses: 81.79% remaining

Survivable.

At 10% risk per trade:​

1. -10% → 90% remaining
2. -10% → 81% remaining
3. -10% → 72.9% remaining ... 10 losses: 34.87% remaining 20 losses: 12.16% remaining

Account destroyed.

Lesson: Small position sizes = longevity.

Position Sizing Checklist​

Before every trade:

• What's my account size?
• What % am I risking? (1-2% recommended)
• Where's my stop loss?
• What's the distance to stop (in ₹)?
• What's my position size calculation?
• Does this exceed portfolio heat limits?
• Can I afford to be wrong?
• Have I rounded down (not up)?

If any answer is unclear: Don't take the trade.

TradeLyser Position Size Calculator​

TradeLyser automates position sizing:

Input:

• Account size: ₹5,00,000
• Risk %: 2%
• Entry: 24,500
• Stop: 24,400

Output:

• Risk amount: ₹10,000
• Position size: 3 lots
• Investment: ₹36,75,000
• Margin required: ₹1,80,000
• Portfolio heat: 5.5% (safe)

Plus automatic alerts:

• "Position size exceeds 2% risk"
• "Portfolio heat above 6%"
• "Consider reducing size"

The Bottom Line​

You can be right about direction 70% of the time and still blow up your account with poor position sizing.

You can be right 50% of the time and steadily grow wealth with proper position sizing.

Position sizing is:

• Not sexy
• Not exciting
• Not fun

But it's the difference between:

• Long-term success and early failure
• Sleeping peacefully and staying awake worried
• Surviving and thriving

Master this skill before worrying about indicators, strategies, or setups.

Take Action Now​

Today:

1. Calculate your position size for your next trade (use the formula)
2. Check if you've been oversizing (be honest)
3. Set a maximum risk % rule

This week:

1. Use TradeLyser position calculator for every trade
2. Track your actual risk per trade
3. Ensure portfolio heat stays safe

This month:

1. Review if smaller positions improve sleep
2. Calculate survival probability at different risk levels
3. Adjust based on comfort and results

👉 Use TradeLyser Position Size Calculator
👉 Download: Position Sizing Spreadsheet
👉 Next: Building Your First Strategy Book

What % do you risk per trade? Have you ever blown up an account? Share your experience.