4 posts tagged with "position sizing"

"Always aim for 1:3 risk-reward"

You've heard this advice everywhere.

But it's wrong.

Let me show you why.

What Is Risk-Reward Ratio?​

Definition: The ratio of potential profit to potential loss

Formula: Risk:Reward = Stop Distance : Target Distance

Example:

• Entry: ₹1,000
• Stop: ₹980 (₹20 risk)
• Target: ₹1,060 (₹60 reward)
• R:R = 1:3

Simple math.

The 1:3 Myth​

Why Everyone Loves 1:3​

The logic:

• "I can lose 3 times and still be profitable"
• "One win covers 3 losses"
• "It's mathematically sound"

The problem: This ignores win rate.

The Real Math​

Scenario A: 1:3 R:R, 30% Win Rate

• 10 trades: 3 wins, 7 losses
• Wins: 3 × ₹60 = ₹180
• Losses: 7 × ₹20 = ₹140
• Net: +₹40

Scenario B: 1:1 R:R, 60% Win Rate

• 10 trades: 6 wins, 4 losses
• Wins: 6 × ₹20 = ₹120
• Losses: 4 × ₹20 = ₹80
• Net: +₹40

Same result!

The key: Win rate matters more than R:R

The Complete Picture​

What Really Matters​

1. Win Rate

• How often you're right
• More important than R:R

2. Risk-Reward Ratio

• How much you win vs lose
• Important but not everything

3. Trade Frequency

• How many opportunities you get
• Affects total returns

4. Position Sizing

• How much you risk per trade
• Determines account impact

All four matter together.

Real Examples​

Example #1: The High R:R Trader​

Setup:

• R:R: 1:4
• Win Rate: 25%
• Trades per month: 8

Monthly Results:

• 8 trades: 2 wins, 6 losses
• Wins: 2 × ₹80 = ₹160
• Losses: 6 × ₹20 = ₹120
• Net: +₹40

Problem: Very few winning trades

Example #2: The High Win Rate Trader​

Setup:

• R:R: 1:1.5
• Win Rate: 70%
• Trades per month: 20

Monthly Results:

• 20 trades: 14 wins, 6 losses
• Wins: 14 × ₹30 = ₹420
• Losses: 6 × ₹20 = ₹120
• Net: +₹300

Better: More consistent profits

Example #3: The Balanced Trader​

Setup:

• R:R: 1:2
• Win Rate: 50%
• Trades per month: 15

Monthly Results:

• 15 trades: 7.5 wins, 7.5 losses
• Wins: 7.5 × ₹40 = ₹300
• Losses: 7.5 × ₹20 = ₹150
• Net: +₹150

Good: Steady, predictable

The Optimal R:R Formula​

The Math​

Expected Value = (Win Rate × Avg Win) - (Loss Rate × Avg Loss)

For breakeven: Win Rate × Avg Win = Loss Rate × Avg Loss

Solving for R:R: R:R = Win Rate ÷ Loss Rate

Examples​

60% Win Rate:

• Loss Rate: 40%
• Optimal R:R: 60% ÷ 40% = 1:1.5

70% Win Rate:

• Loss Rate: 30%
• Optimal R:R: 70% ÷ 30% = 1:2.33

50% Win Rate:

• Loss Rate: 50%
• Optimal R:R: 50% ÷ 50% = 1:1

40% Win Rate:

• Loss Rate: 60%
• Optimal R:R: 40% ÷ 60% = 1:1.5

Why 1:3 Often Fails​

Problem #1: Low Win Rate​

To make 1:3 work, you need:

• Win Rate > 25%
• But most traders can't achieve this consistently

Reality: Most traders have 40-50% win rate

Problem #2: Fewer Opportunities​

High R:R setups are rare:

• Need perfect conditions
• Wait longer for setups
• Miss other opportunities

Result: Lower trade frequency

Problem #3: Psychological Pressure​

High R:R = High Pressure:

• "This trade must work"
• "I can't afford to lose"
• "I need this win"

Result: Poor execution

Problem #4: Market Reality​

Markets don't move in perfect ratios:

• Targets often not hit
• Stops often hit
• Reality ≠ Theory

The Better Approach​

Step 1: Find Your Win Rate​

Track your last 50 trades:

• How many won?
• What's your actual win rate?

Example: 30 wins out of 50 = 60% win rate

Step 2: Calculate Optimal R:R​

Formula: R:R = Win Rate ÷ Loss Rate

Example:

• Win Rate: 60%
• Loss Rate: 40%
• Optimal R:R: 60% ÷ 40% = 1:1.5

Step 3: Test Different R:R​

Try these scenarios:

Conservative (1:1.2):

• Lower pressure
• More opportunities
• Steady profits

Moderate (1:1.5):

• Balanced approach
• Good opportunities
• Solid profits

Aggressive (1:2):

• Higher pressure
• Fewer opportunities
• Bigger wins

Step 4: Optimize Based on Results​

Track for 3 months:

• Which R:R works best?
• What's your actual win rate?
• Adjust accordingly

R:R by Trading Style​

Scalping (1:0.8 to 1:1.2)​

Characteristics:

• High win rate (60-70%)
• Low R:R acceptable
• High frequency

Example:

• Win Rate: 65%
• R:R: 1:1
• Result: Profitable

Day Trading (1:1.5 to 1:2)​

Characteristics:

• Moderate win rate (50-60%)
• Moderate R:R
• Medium frequency

Example:

• Win Rate: 55%
• R:R: 1:1.8
• Result: Profitable

Swing Trading (1:2 to 1:3)​

Characteristics:

• Lower win rate (40-50%)
• Higher R:R needed
• Lower frequency

Example:

• Win Rate: 45%
• R:R: 1:2.2
• Result: Profitable

Position Trading (1:3 to 1:5)​

Characteristics:

• Low win rate (30-40%)
• Very high R:R needed
• Very low frequency

Example:

• Win Rate: 35%
• R:R: 1:3
• Result: Profitable

The Psychology of R:R​

High R:R Problems​

1. Perfectionism:

• "This trade must hit target"
• "I can't exit early"
• "I need the full move"

2. Impatience:

• "When will it move?"
• "Why is it taking so long?"
• "I should exit now"

3. Fear:

• "What if it reverses?"
• "I can't afford to lose"
• "This is my only chance"

Lower R:R Benefits​

1. Realistic Expectations:

• "Small wins are fine"
• "I'll take what I can get"
• "Consistency matters"

2. Less Pressure:

• "I don't need perfect trades"
• "I can exit early if needed"
• "There are more opportunities"

3. Better Execution:

• "I'll follow my plan"
• "I won't force trades"
• "I'll be patient"

Advanced R:R Concepts​

Dynamic R:R​

Adjust R:R based on:

Market Conditions:

• Trending: Higher R:R possible
• Ranging: Lower R:R needed
• Volatile: Lower R:R safer

Setup Quality:

• A+ setup: Higher R:R
• B setup: Lower R:R
• C setup: Skip trade

Personal State:

• Confident: Higher R:R
• Stressed: Lower R:R
• Tired: Lower R:R

Partial Exits​

Instead of fixed R:R:

Exit 50% at 1:1 Exit 30% at 1:2 Let 20% run

Benefits:

• Lock in profits
• Reduce pressure
• Let winners run

Trailing Stops​

Start with 1:1 R:R Move stop to breakeven at +1R Trail stop as price moves

Result: Often achieve 1:2+ R:R

The Bottom Line​

Don't chase 1:3 R:R.

Instead:

1. Find your win rate
2. Calculate optimal R:R
3. Test different ratios
4. Optimize based on results

Remember:

• Win rate > R:R
• Consistency > Perfection
• Profits > Ratios

The best R:R is the one that works for YOU.

Take Action Now​

This Week:

1. Calculate your actual win rate (last 50 trades)
2. Determine your optimal R:R
3. Test it with small position sizes

This Month:

1. Track R:R vs win rate
2. Find your sweet spot
3. Optimize your approach

This Quarter:

1. Refine your R:R strategy
2. Measure improvement
3. Share results with community

👉 Calculate Your Optimal R:R in TradeLyser
👉 Download: R:R Calculator
👉 Next: Building a Trading Strategy from Scratch

What's your optimal R:R ratio? How did you find it? Share below.

Options trading is different.

Your risk isn't just the premium paid.
It's the premium paid × number of lots.
Plus margin requirements.
Plus assignment risk.

Let me show you how to size options positions correctly.

The Options Risk Challenge​

Equity vs Options Risk​

Equity trading:

• Risk: Stop loss distance
• Simple calculation
• Clear limits

Options trading:

• Risk: Premium paid (buying)
• Risk: Unlimited (selling)
• Risk: Assignment (short positions)
• Risk: Time decay
• Risk: Volatility changes

Much more complex.

Common Options Mistakes​

Mistake #1: "I only paid ₹5,000 premium, so I can risk ₹5,000"

Reality: If you buy 10 lots, you risk ₹50,000

Mistake #2: "Selling options is safe, I'll sell many lots"

Reality: One bad move can wipe out months of premiums

Mistake #3: "I'll use all my capital for options"

Reality: Options can go to zero. Equity can't.

Position Sizing for Options Buying​

The Basic Formula​

For buying options:

Position Size = (Account Risk %) ÷ (Premium Risk %)

Where:
Account Risk % = % of account you want to risk
Premium Risk % = % of premium you expect to lose

Example #1: Buying Call Options​

Setup:

• Account: ₹5,00,000
• Risk per trade: 2% = ₹10,000
• NIFTY 24500 CE @ ₹150
• Expected loss if wrong: 100% (premium)
• Lot size: 50

Calculation:

Premium Risk % = 100% (total loss)
Position Size = 2% ÷ 100% = 2% of account
Position Value = ₹5,00,000 × 2% = ₹10,000
Number of lots = ₹10,000 ÷ (₹150 × 50) = 1.33 lots
Round down: 1 lot
Investment: 1 × 50 × ₹150 = ₹7,500
Risk: ₹7,500 (1.5% of account)

Example #2: Buying Put Options​

Setup:

• Account: ₹3,00,000
• Risk per trade: 1.5% = ₹4,500
• RELIANCE 2500 PE @ ₹80
• Expected loss: 100%
• Lot size: 250

Calculation:

Position Size = 1.5% ÷ 100% = 1.5%
Position Value = ₹3,00,000 × 1.5% = ₹4,500
Number of lots = ₹4,500 ÷ (₹80 × 250) = 0.225 lots
Round down: Can't buy fractional lots
Maximum: 0 lots (too expensive)
Alternative: Find cheaper option or increase account

Example #3: Buying Multiple Options​

Setup:

• Account: ₹10,00,000
• Risk per trade: 2% = ₹20,000
• Strategy: Buy 1 call + 1 put (straddle)
• Call: ₹200, Put: ₹180
• Total premium: ₹380 per lot
• Expected loss: 100%

Calculation:

Position Size = 2% ÷ 100% = 2%
Position Value = ₹10,00,000 × 2% = ₹20,000
Number of lots = ₹20,000 ÷ ₹380 = 52.6 lots
Round down: 52 lots
Investment: 52 × ₹380 = ₹19,760
Risk: ₹19,760 (1.98% of account)

Position Sizing for Options Selling​

The Margin Challenge​

Selling options requires margin:

• SPAN margin
• Exposure margin
• Premium received (reduces margin)

Risk: Unlimited (theoretical)

Conservative Approach​

Rule: Risk only 1% of account per trade

Example: Selling Call Options

Setup:

• Account: ₹5,00,000
• Risk per trade: 1% = ₹5,000
• NIFTY 25000 CE @ ₹100
• Margin required: ₹1,20,000 per lot
• Premium received: ₹5,000 per lot

Calculation:

Maximum margin per trade = ₹5,000
Maximum lots = ₹5,000 ÷ ₹1,20,000 = 0.04 lots
Not possible (minimum 1 lot)

Alternative: Use smaller account portion
Use 0.5% risk = ₹2,500
Still not enough margin

Solution: Use spreads to reduce margin

Using Spreads to Reduce Risk​

Bull Put Spread Example:

Setup:

• Sell NIFTY 24000 PE @ ₹200
• Buy NIFTY 23900 PE @ ₹150
• Net premium: ₹50
• Margin: ₹25,000 per lot
• Max loss: ₹4,500 per lot

Calculation:

Account: ₹5,00,000
Risk per trade: 1% = ₹5,000
Max loss per lot: ₹4,500
Maximum lots: ₹5,000 ÷ ₹4,500 = 1.1 lots
Round down: 1 lot
Investment: ₹25,000 margin
Risk: ₹4,500 (0.9% of account)

Advanced Position Sizing​

Kelly Criterion for Options​

Formula:

Kelly % = (Win Rate × Avg Win - Loss Rate × Avg Loss) ÷ Avg Win

Example:
Win Rate: 60%
Avg Win: ₹3,000
Loss Rate: 40%
Avg Loss: ₹2,000

Kelly = (0.6 × 3000 - 0.4 × 2000) ÷ 3000
     = (1800 - 800) ÷ 3000
     = 0.33 = 33%

Too aggressive for options!

Use Fractional Kelly:

• Quarter Kelly: 8.25%
• Half Kelly: 16.5%
• Recommendation: Quarter Kelly maximum

Volatility-Based Sizing​

High VIX (>20):

• Reduce position size by 50%
• Options more expensive
• Higher risk

Low VIX (<15):

• Normal position size
• Options cheaper
• Lower risk

Example:

Normal position size: 2%
High VIX adjustment: 2% × 0.5 = 1%
Low VIX adjustment: 2% (no change)

Options-Specific Risk Factors​

Factor #1: Time Decay​

Buying options:

• Time works against you
• Position size should account for time decay
• Shorter expiry = smaller position

Selling options:

• Time works for you
• Can use larger positions
• But still limited by margin

Factor #2: Volatility​

High volatility:

• Options expensive
• Higher risk
• Smaller positions

Low volatility:

• Options cheap
• Lower risk
• Larger positions possible

Factor #3: Liquidity​

High liquidity (NIFTY, Bank NIFTY):

• Tight spreads
• Easy to exit
• Normal position sizes

Low liquidity:

• Wide spreads
• Hard to exit
• Smaller positions

Factor #4: Assignment Risk​

Selling options:

• Risk of early assignment
• Need to hold underlying
• Account for assignment cost

Example:

Sell RELIANCE 2500 CE @ ₹50
If assigned: Must buy 250 shares @ ₹2,500
Cost: ₹6,25,000
Account: ₹5,00,000
Problem: Can't afford assignment!

Position Sizing by Strategy​

Strategy #1: Long Calls/Puts​

Risk: Premium paid
Position size: 1-2% of account
Example: ₹5,00,000 account = ₹5,000-₹10,000 per trade

Strategy #2: Covered Calls​

Risk: Underlying stock risk
Position size: Based on stock risk (2% rule)
Example: 100 shares × ₹2,500 = ₹2,50,000 position

Strategy #3: Cash-Secured Puts​

Risk: Stock assignment risk
Position size: Based on assignment cost
Example: ₹2,50,000 cash for ₹2,500 strike put

Strategy #4: Spreads​

Risk: Spread width
Position size: 1-2% of account
Example: ₹5,000 risk for ₹5,00,000 account

Strategy #5: Iron Condors​

Risk: Spread width
Position size: 1% of account
Example: ₹5,000 max loss for ₹5,00,000 account

Real Examples​

Example #1: NIFTY Call Buying​

Setup:

• Account: ₹5,00,000
• NIFTY 24500 CE @ ₹150
• Expiry: 1 week
• Risk: 2% = ₹10,000

Calculation:

Premium per lot: ₹150 × 50 = ₹7,500
Maximum lots: ₹10,000 ÷ ₹7,500 = 1.33
Round down: 1 lot
Investment: ₹7,500
Risk: ₹7,500 (1.5% of account)

Result: Good position size

Example #2: RELIANCE Put Selling​

Setup:

• Account: ₹5,00,000
• RELIANCE 2500 PE @ ₹100
• Margin: ₹1,50,000 per lot
• Risk: 1% = ₹5,000

Calculation:

Margin per lot: ₹1,50,000
Maximum lots: ₹5,000 ÷ ₹1,50,000 = 0.033
Not possible (minimum 1 lot)

Problem: Margin too high for account size
Solution: Use spreads or increase account

Example #3: Bank NIFTY Spread​

Setup:

• Account: ₹5,00,000
• Bull Put Spread
• Max loss: ₹3,000 per lot
• Risk: 1% = ₹5,000

Calculation:

Maximum lots: ₹5,000 ÷ ₹3,000 = 1.67
Round down: 1 lot
Investment: ₹15,000 margin
Risk: ₹3,000 (0.6% of account)

Result: Good position size

Common Mistakes​

Mistake #1: Using All Capital​

Wrong: "I have ₹5L, I'll buy ₹5L worth of options"
Right: Risk only 1-2% per trade

Mistake #2: Ignoring Margin​

Wrong: "I'll sell 10 lots, I only need ₹50K"
Right: Check margin requirements first

Mistake #3: No Stop Loss​

Wrong: "Options can't lose more than premium"
Right: Set stop loss at 50% premium loss

Mistake #4: Over-Leveraging​

Wrong: "I'll buy 20 lots with ₹1L"
Right: Buy 1-2 lots maximum

The Bottom Line​

Options position sizing is more complex than equity.

Key principles:

• Risk only 1-2% per trade
• Account for margin requirements
• Consider assignment risk
• Use spreads to reduce risk
• Never risk more than you can afford to lose

Simple rule: If you're not sure, use smaller position size.

Take Action Now​

Today:

1. Calculate your maximum options position size
2. Write it down where you trade
3. Use it for your next options trade

This Week:

1. Practice position sizing calculations
2. Test with paper trading
3. Refine your approach

This Month:

1. Track options position sizing adherence
2. Analyze: Did you follow rules?
3. Adjust based on results

👉 Use TradeLyser Options Position Calculator
👉 Download: Options Position Sizing Calculator
👉 Next: Risk-Reward Ratios - Why 1:3 Isn't Always Better

How do you size your options positions? What's your biggest challenge? Share below.

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.