Defining Risk Per Trade & Stop-Losses

Many traders use a simple convention: risk no more than 1% to 2% of trading capital on one trade. This is a habit used by many desks, not a law, and the right figure depends on your own situation. The point is not the exact number. The point is that each single loss stays small, so that a string of losses does not end your account.

The reason is arithmetic. If you lose 10%, you need to gain 11.1% to get back, because you are climbing from a smaller base. Lose 50% and you need a 100% gain. The deeper the hole, the steeper the climb. So a rule that keeps each loss small also keeps the recovery climb short.

See what a losing streak does. With capital of Rs 5,00,000 and 1% risk, ten losses in a row leave about 90.4% of the money (0.99 multiplied ten times). With 10% risk, only five losses in a row leave about 59% (0.90 multiplied five times). The second trader has lost 41% in five trades. Both are illustrations of arithmetic, not forecasts of how often streaks occur.

A lot is the fixed pack size of a contract. You cannot buy half a lot. So the sum is: rupee risk you accept, divided by the loss on one lot if your stop is hit. Round down to a whole number.

Illustration with a Bank Nifty option, lot of 30 units (NSE revised it from 35 to 30 in January 2026; confirm the current size). Capital Rs 5,00,000, risk 1% = Rs 5,000. You buy a call at a premium of Rs 300 and decide to exit if it falls to Rs 250, a fall of 50 points. Loss on one lot = 50 x 30 = Rs 1,500. Lots = 5,000 / 1,500 = 3.33, so 3 lots. Cost of 3 lots = 300 x 30 x 3 = Rs 27,000, which must be in the account before the order.

Now the honest limits. If the premium gaps from Rs 300 to Rs 200 overnight, your stop of Rs 250 does not protect you: the loss is 100 x 30 x 3 = Rs 9,000 and not the planned Rs 4,500. Wide bid-ask spreads can also make the real exit price worse than the stop. The formula sets a ceiling on planned size, and a plan can still be surprised.

Maximum drawdown (MDD) is the largest fall from a peak in your account value to the next low, before a new peak. Suppose your account grew to Rs 5,00,000 and then fell to Rs 4,20,000. The drawdown is (5,00,000 - 4,20,000) / 5,00,000 = 16%. It tells you how much pain a method has caused in the past, which return figures do not show.

Some traders write a rule for deep drawdowns, such as cutting risk per trade by half after a 10% fall from the peak and returning to full size after the account recovers part of the fall. The idea is to slow down when the method may not be fitting the market. It is a choice, not a rule of nature.

Every such rule has a price. Trading smaller during a drawdown also slows your recovery, and you may cut size just before conditions improve. The rule protects you from the worst case and gives up some of the best case. Decide your rule in advance, when you are calm, and write it down.

Portfolio heat is the total risk you have open at the same time. If you risk 1% on each of ten trades, your heat is 10%. But if all ten trades are long on shares that rise and fall with the same market, one fall can hit all ten stops together. Then you do not have ten small risks; you have one large one.

Correlation is the word for how closely two things move together. Trades in different sectors or with opposite views may have lower correlation. In sharp market falls, though, many shares fall together, so real diversification is often less than it looks on a calm day.

A simple habit is to cap total open risk as well as risk per trade. The cap is your choice; 5% is an example number only. Also list which trades depend on the same idea, and count them as one.