Chapter 4 | 3 min read

Position Sizing

Introduction

Two traders can take the same trade and have completely different results because of how many shares they buy. Position sizing decides how much you can lose on a trade. It is the secret weapon of professional traders and the most ignored topic among beginners.

The 1% Risk Rule

Never risk more than 1% (maximum 2%) of your total trading capital on a single trade. Risk means the amount you lose if your stop-loss is hit, not the amount you invest.

With a 1% rule, even 10 losing trades in a row reduce your capital by only about 10%. You stay in the game and live to trade another day.

The Position Size Formula

Quantity = (Capital x Risk %) / (Entry Price - Stop-Loss Price)

Example 1

  • Capital: Rs 3,00,000
  • Risk per trade: 1% = Rs 3,000
  • Entry: Rs 1,250. Stop-loss: Rs 1,220. Risk per share: Rs 30.
  • Quantity = 3,000 / 30 = 100 shares.
  • Investment = 100 x Rs 1,250 = Rs 1,25,000.

If the stop-loss hits, you lose about Rs 3,000 plus charges. That is 1% of your capital.

Example 2: Wide Stop-Loss

  • Same capital and risk: Rs 3,000.
  • Entry: Rs 500. Stop-loss: Rs 460. Risk per share: Rs 40.
  • Quantity = 3,000 / 40 = 75 shares.

A wider stop means fewer shares. A tighter stop allows more shares. Your rupee risk stays the same.

Risk-Reward Ratio

Only take trades where the potential reward is at least 2 times the risk.

  • Risk: Rs 30 per share. Target must give at least Rs 60 per share.
  • If the next resistance is only Rs 20 away, skip the trade.

Why This Works: The Maths

Win rateRisk-rewardResult over 10 trades (Rs 3,000 risk each)
40%1:24 x 6,000 - 6 x 3,000 = +Rs 6,000
50%1:25 x 6,000 - 5 x 3,000 = +Rs 15,000
60%1:16 x 3,000 - 4 x 3,000 = +Rs 6,000
40%1:14 x 3,000 - 6 x 3,000 = -Rs 6,000

You do not need to win most trades. You need your winners to be bigger than your losers.

Total Portfolio Risk

Keep total risk across all open trades within 5% to 6% of capital. If you already have 5 open trades each risking 1%, do not open a sixth until one closes or its stop-loss moves to breakeven.

Maximum Position Size

Also limit how much capital goes into one stock, for example 20% to 25%. This protects you from gap-down surprises in any single stock.

Common Mistakes

  • Buying a fixed number of shares every time regardless of the stop-loss.
  • Doubling position size after a loss to recover quickly.
  • Averaging down a losing swing trade.

On GoPocket

Calculate your quantity with the formula before you tap Buy on the GoPocket app. Enter the exact quantity, then place your stop-loss order right after execution.

Frequently Asked Questions

Is 1% risk too small?

It feels small, but it protects you during losing streaks, which every trader faces.

Should I increase risk when I am confident?

No. Confidence is an emotion. Keep risk constant.

Key Takeaways

  • Risk only 1% of capital per trade.
  • Use the position size formula every time.
  • Aim for at least 1:2 risk-reward.

Disclaimer: Hypothetical numbers. Charges and taxes not included.