Section 2 · Module 2.5
Risk & Capital Management
6 min read1% risk position sizer
Buy 40 shares (max risk ₹2,000)
Compounding / return lab
Educational compound-interest toy — not a forecast. Higher monthly % usually means higher risk of large drawdowns.
Ending value
₹10,76,516
Multiple
10.8×
Doubling time
~2.9 yrs
Formula: FV = PV × (1 + r)n with monthly compounding. Taxes, fees, and sequence risk are ignored.
Risk-to-Reward Ratio (R:R)
R:R compares stop-loss distance to profit target. Risk ₹10 to make ₹20 = 1:2 ratio.
With 1:2 R:R you can lose 60% of trades and still be profitable — you do not need to be right every time.
Dynamic Position Sizing (1% Rule)
Never risk more than 1% of account capital on one trade:
Quantity = (Capital × 0.01) ÷ (Entry − Stop-loss)
Example: ₹1,00,000 capital → ₹1,000 max risk. Entry ₹500, stop ₹480 → risk ₹20/share → 50 shares.
Trading Psychology
- FOMO: Chasing extended rallies at poor R:R.
- Revenge trading: Oversizing after a loss to “get even.”
- Disposition effect: Holding losers too long, cutting winners too early.
Knowledge check
Capital ₹2,00,000; buy at ₹1,000; stop at ₹950. Per 1% rule, how many shares?
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