30-Day Stock Market Series
Day 17 of 30
Risk Management: How Professionals Protect Capital
Traders who stay in the game long enough eventually win. The ones who blow up never get another chance. Day 17 is the most important lesson in this series.
The First Law of Trading
Rule #1: Never Lose Big"The first rule is not to lose. The second rule is not to forget Rule #1." — Warren Buffett. Preservation of capital must come before pursuit of profit.
Position Sizing: The 1-2% Rule
Never risk more than 1–2% of your total capital on a single trade. This means if your portfolio is ₹5 lakhs, your maximum loss per trade should be ₹5,000–₹10,000.
Position Size = (Portfolio × Risk%) / (Entry Price − Stop Loss Price)
# Position sizing calculator
portfolio_value = 500000 # ₹5 Lakhs
risk_percent = 0.02 # 2% risk per trade
entry_price = 1580
stop_loss = 1540
risk_per_share = entry_price - stop_loss
max_risk_capital = portfolio_value * risk_percent
shares_to_buy = int(max_risk_capital / risk_per_share)
print(f"Max shares to buy: {shares_to_buy}")
print(f"Capital deployed: ₹{shares_to_buy * entry_price:,}")
print(f"Max loss if SL hit: ₹{shares_to_buy * risk_per_share:,}")
Reward-to-Risk Ratio (R:R)
Only take trades where the potential reward is at least 2× the potential risk. If your stop-loss is ₹40 away, your target must be ₹80+ away.
R:R = (Target Price − Entry) / (Entry − Stop Loss)
With a minimum 2:1 R:R, you only need to be right 40% of the time to break even. At 3:1 R:R, you can be wrong 60% of the time and still profit.
Diversification Rules
- No single stock > 10% of portfolio (5% for small-caps)
- No single sector > 25% of portfolio
- Always keep 10–15% in cash for opportunities
- Rebalance quarterly — trim winners, add to quality laggards
Drawdown Recovery Math
-20% loss needs +25% to recover. -40% loss needs +67% to recover. -50% loss needs +100% to recover.Compounding Destruction
A trader losing 10% per month for 6 months is down 47%. One big loss can destroy months of gains.Today's Non-Negotiable
Calculate your position size for your next trade using the formula above. If you can't define your stop-loss in advance, you have no business entering the trade.