Week 2: Learn Risk Management and Position Sizing

Risk management should be designed before entry signals. A strategy that earns small profits but occasionally suffers one uncontrolled loss is unsuitable for automation.

Study these areas

• Risk per trade and stop-loss placement
• Risk-to-reward ratio
• Maximum daily loss and maximum portfolio exposure
• Consecutive losing trades and percentage drawdown
• Position sizing

The most important calculation in algo trading

Suppose your trading capital is ₹2,00,000 and you risk 0.5% per trade:

2,00,000 × 0.5% = ₹1,000 maximum loss per trade

If your entry is ₹500 and your stop-loss is ₹495, the risk per share is ₹5:

Quantity = ₹1,000 ÷ ₹5 = 200 shares

This gives a theoretical maximum quantity. The final quantity must also respect available margin, liquidity, applicable lot sizes and regulatory limits.

Practical exercise

Create a spreadsheet with these columns and test it on ten hypothetical trades:

• Trading capital and permitted risk percentage
• Entry price and stop-loss price
• Risk per unit and calculated quantity
• Estimated trading cost and maximum possible loss

Week 2 outcome

You should be able to calculate position size based on risk rather than selecting an arbitrary quantity.

This lesson is for educational purposes only. It is not  investment advice, a recommendation or an assurance of returns. Trading and derivatives involve substantial risk, and backtested or paper-trading results do not guarantee future performance.