You can have a 70% win rate strategy and still blow up your account. Conversely, you can be profitable with just a 40% win rate. The difference? Position sizing — the single most important aspect of trading that most beginners completely ignore.
The 2% Rule: Never Risk More Than 2% Per Trade
If your trading capital is Rs 5,00,000, your maximum risk per trade is Rs 10,000. This means:
- If your stop-loss is Rs 50 per share → Position size = 200 shares
- If your stop-loss is Rs 100 per share → Position size = 100 shares
- If your stop-loss is Rs 20 per share → Position size = 500 shares
Notice: the position size adapts to the risk, not the other way around. You never adjust your stop-loss to fit a desired position size — that’s how accounts get destroyed.
Why 2%? The Math of Ruin
With 2% risk per trade, you need 35 consecutive losers to lose 50% of your capital — essentially impossible with any reasonable strategy. Compare:
- 2% risk: After 10 consecutive losses, you’re down 18.3%. Recoverable.
- 5% risk: After 10 consecutive losses, you’re down 40.1%. Very difficult to recover.
- 10% risk: After 10 consecutive losses, you’re down 65.1%. Account is effectively dead.
The Kelly Criterion: Optimal Bet Sizing
For advanced traders with a proven track record, the Kelly Criterion provides the mathematically optimal position size:
Kelly % = W – [(1-W) / R]
Where W = Win rate, R = Average win / Average loss ratio
Example: Win rate 55%, Avg win Rs 200, Avg loss Rs 100 (R = 2)
Kelly % = 0.55 – (0.45/2) = 0.325 or 32.5%
Most professional traders use “Half Kelly” (16.25% in this case) to reduce volatility.
Position Sizing for Options Traders
Options require a different framework since your max loss is the premium paid:
- Option buyers: Risk no more than 2% of capital per trade. If your capital is Rs 5 lakh, max premium outlay = Rs 10,000 per trade
- Option sellers: Risk no more than 1% based on your stop-loss point (not the maximum theoretical loss)
- Spreads: Risk the max loss of the spread, which should not exceed 2% of capital
Daily and Weekly Risk Limits
Beyond per-trade limits, set aggregate limits:
- Daily loss limit: Stop trading if you lose 4% in a single day (2 consecutive losing trades)
- Weekly loss limit: Stop trading for the week if down 6%
- Monthly drawdown limit: Switch to paper trading if down 10% in a month — your strategy needs review