One post tagged with "money management"

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.