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| Stock Market | Day 7 |
Risk Management — The Skill That Keeps You in the Game
Most beginners think:
"If I can predict the market correctly, I'll make money."
Professional traders think:
"If I'm wrong, how much can I lose?"
That difference changes everything.
The Truth About Trading
Even the best traders are wrong.
A trader with:
40% win rate
Good risk management
can be profitable.
A trader with:
70% win rate
Poor risk management
can lose money.
Rule #1: Protect Capital First
Your first goal is NOT to make money.
Your first goal is:
Do not lose significant capital.
Why?
Because if you lose 50% of your capital:
₹1,00,000 → ₹50,000
To recover back to ₹1,00,000, you need:
100% gain.
Recovery becomes much harder.
Rule #2: Always Use a Stop Loss
A stop loss is your emergency exit.
Example:
Buy = ₹100
Stop Loss = ₹95
Maximum loss = ₹5/share
If the trade goes wrong, the loss is limited.
Why Beginners Avoid Stop Losses
They think:
"It will come back."
Sometimes it does.
Sometimes it doesn't.
Many large losses start with:
"I'll wait a little more."
Rule #3: Risk Only a Small Portion Per Trade
Professional traders don't risk their entire account.
A common guideline:
Risk 1% per trade
Example:
Capital = ₹1,00,000
1% risk = ₹1,000
Maximum loss on a trade = ₹1,000
Even after 10 losing trades:
Loss = ₹10,000
Account survives.
Position Sizing
This is how professionals decide quantity.
Example:
Capital = ₹1,00,000
Risk per trade = ₹1,000
Stock entry = ₹100
Stop Loss = ₹95
Risk/share = ₹5
Quantity:
₹1,000 ÷ ₹5 = 200 shares
This is proper position sizing.
Rule #4: Never Risk More Than You Can Afford
Bad Example:
Capital = ₹50,000
Put entire ₹50,000 into one trade.
If something unexpected happens, damage is large.
Better:
Spread risk intelligently.
Risk-to-Reward Ratio (R:R)
This is one of the most powerful concepts in trading.
Example:
Entry = ₹100
Stop Loss = ₹95
Target = ₹115
Risk = ₹5
Reward = ₹15
Risk:Reward = 1:3
Meaning:
For every ₹1 risked,
you aim to make ₹3.
Why Risk:Reward Matters
Imagine 10 trades.
Scenario A
Win Rate = 50%
Risk = ₹100
Reward = ₹300
Wins:
5 × ₹300 = ₹1,500
Losses:
5 × ₹100 = ₹500
Net Profit = ₹1,000
Scenario B
Win Rate = 70%
Risk = ₹300
Reward = ₹100
Wins:
7 × ₹100 = ₹700
Losses:
3 × ₹300 = ₹900
Net Loss = ₹200
Higher win rate, yet losing money.
That's why R:R is critical.
The 2% Rule
Many traders use:
1% risk per trade (conservative)
2% maximum risk per trade
For beginners, I recommend:
Start with 1%
It protects you while learning.
Common Risk Management Mistakes
❌ No Stop Loss
Most dangerous.
❌ Averaging Down Blindly
Buy at ₹100
Falls to ₹90
Buy more
Falls to ₹80
Buy more
Falls to ₹60
Disaster.
❌ Revenge Trading
Loss happens.
Trader gets emotional.
Takes random trades.
Usually creates larger losses.
❌ Overtrading
More trades ≠ More profits.
Often:
More trades = More mistakes.
Golden Formula
Before every trade ask:
Where is my entry?
Where is my stop loss?
What is my target?
What is my risk?
Is reward at least 2× risk?
If you cannot answer these questions, don't enter the trade.
Trading Journal
Professionals track trades.
Record:
Stock name
Entry
Stop Loss
Target
Result
Mistake
Lesson learned
This accelerates improvement.
Example of a Complete Trade Plan
Capital = ₹1,00,000
Risk per trade = 1% = ₹1,000
Stock Entry = ₹500
Stop Loss = ₹490
Risk/share = ₹10
Quantity:
₹1,000 ÷ ₹10 = 100 shares
Target:
₹530
Reward = ₹30/share
Risk:Reward = 1:3
This is a structured trade.
The Professional Mindset
Amateurs ask:
"How much can I make?"
Professionals ask:
"How much can I lose?"
Protecting capital comes first. Profits come later.
Homework
For a stock you are watching, calculate:
Entry price
Stop Loss
Target
Risk per share
Risk:Reward ratio
Send it to me, and I'll check whether it's a good trade setup.
Next Lesson: Moving Averages (EMA & SMA)
You'll learn:
20 EMA
50 EMA
200 EMA
Golden Cross
Death Cross
Using moving averages for trend and support
These are among the most widely used tools in technical analysis. 📈
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