20

Risk Management
Risk Reward | Position Sizing
 Mark Douglas, in his book ‘The Disciplined Trader’, says successful
Risk Management trading is 80% money management and 20% strategy. We could not agree more.

Topic Why most of the traders fail even through they are good at technical analysis.

N G
D I
Trading the stock market inherently involves some level of risk. Yet the majority of people attracted to the market are willing to take higher

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risks, believing they are adequately equipped to trade after reading a few books or attending a weekend course. Indeed, many traders seek
out instant gratification, plunging head-first into the stock market using complex strategies in the hope of profiting from their efforts. Sadly,
many lose their hard-earned savings on unrealistic expectations.

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Trading Triangle
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Risk Management > Technical Analysis

3 to 5% profit
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Let's say the average trader wins 60% of the time. When he wins books his profit early with FEAR
of losing them Let's say on average he wins Rs.5,000 per trade & when he loses he does not cut his

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net off fee losses immediately in the HOPE of recovery & let's say at an average he lose Rs.8,000 per trade.

Only 7%
remains after
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After 100 trades the loss is 20,000 [60*5000 - 40*8000] before charges and obviously, it will go
much higher if we include brokerage fee, etc. Here even though he is technically good but he is not
5 years

F L managing his risk properly.

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80% quit within the
If he would have followed a min of 1:2 risk-reward model which means no matter what if his trade
first 2 years

I N is moving in an unfavorable direction. He blindly cut his position when it reaches Rs.2,500 per
trade which is 50% of the profit he makes per trade. [1:2 risk-reward ratio]

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40% trade only for 3 months

All traders start with dream to get

In this situation is profit would have been Rs.2,00,000 [60*5000 - 40*2500]. YES, a simple strict
risk-reward has an effect of making a 20K loss to 2 Lakhs profit. By following this risk-reward even
if he wins only 40% of the time still, he will end up making Rs.50,000 profit [40*5000 - 60*2500]
rick quick
Topic Why not loosing is much important than winning

The soon you understand that protecting your capital is utmost priority than making profits you'll be able to sustain in
the market. Once you are able to sustain then you can think of making money. Survival is the key in trading.

For example, a loss of 10% requires a gain of just 11% to recover, a loss of 25% requires a strong gain of 33% to recover, while a loss of 30%
(not much bigger than the previous 25% loss) requires a gain of 43% (much higher than the 33% needed to recover from a 25% loss), etc. A
loss of 50% requires a gain of 100% to recover, and typically, a loss of 60% or more in the markets is almost unrecoverable.

Small losses can become large very quickly due to loss of existing capital.

“In order to make money in the markets, the importance is not to lose” meant: One has to keep losses small, as the bigger
they are, the harder it is to recover. Capital preservation is the Key.
Topic Position Sizing & Risk Reward

Position sizing and risk reward has to be studied together. Position sizing depends on how much risk the traders is able to
take and it will be different for different traders. Position sizing is the glue that holds risk to reward scenarios together.

Where most traders mess up in position sizing is in fitting their stop loss to their desired position size instead of fitting their position size to
their desired stop loss.
For example,
Let's say you are watching L&T share for potential trading opportunities. Say your capital is Rs.100,000 and you are risking only 1% per
trade which is Rs.1,000. Now you see a really good trade setup. The L&T stock at Rs.1362 and is a good point to enter and you want to buy
70 shares (maximum shares that can be bought with 1 Lakh without considering any kind of leverage)

You enter the trade and places stop loss 14 points below i.e at 1348 since your max loss is (14* 70 = 1,000 approx). You may think you have
successfully managed the risk by limiting it to Rs.1,000/- but it got stopped out quickly by touching 1348 and bouncing back to 1410. Hence
you made a loss of Rs.1,000.

The problem here is you have not managed your risk properly because you have placed your stop loss based on your capital and not based
on the actual logical stop loss.

Let's say for L&T if you are entering at 1362, then may there is strong support at 1340, so the logical stop loss would be at Rs.1338. Now that
you know you are risking 24 points for Rs.1,000. Now you need to calculate the position sizing (Rs.1000/24 = 42 shares).

Ideally, you should have bought 42 shares at 1362 by placing your stop loss at 1338.
Risk Management
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Topic

N D Position Sizing & Risk Reward

M I Steps in arriving at the perfect position

size based on proper risk-reward
STEP 1 - Calculate your per-trade risk amount. Ideally, it should be 1% or max 2% of your trading
capital (do not include leverage provided by broker)
Let's say your capital is Rs.100,000 and but for a particular trade if you decide to risk 1%, you risk a maximum of Rs.1,000/-

STEP 2 - Finding right trading opportunity with an edge and figuring out the ideal stop-loss price.
With the application of all your technical analysis, trading strategies & setups you must identify a potential trade opportunity. Remember
that if there is no trade opportunity as per your setups you should not take up the trade as having an edge while entering taking up
trade is very very important.

Once you find a trade signal as per your trade setup then immediately you must find out your exit point. It is very important to figure out
the exit point. If you do not know where to keep the stop loss you should not take up a trade. Also, you cannot place your stop loss in a
vague manner like 2 points, 3 points, etc. Your stop loss should be supported by technical and logical reasons. It should be safeguarded
by any support/resistance zone or dynamic support and resistances like 8/20 EMA or in multiples of Average True range ATR etc.
Support / Resistance Levels, CPR, etc.

In the above L&T example, you have identified your long entry point as 1362, logical target as 1410, and logical stop loss at 1338.
STEP 3 - Calculate the no of points difference b/w entry point, Stoploss & active at position sizing
Here the difference b/w stop loss & entry point is 24 points (1362-1338).
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You are risking Rs,1,000
Max Position size = Risk amount / no of points risking = Rs.1,000/24 = 42 shares approx.
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R A
Even if you use the Intraday leverage the above concept will not change. T
A L
T I
But you need to make sure that you should not compromise on reducing your stop loss or
increasing your risk to your position sizing. It should be other way around that you must arrive at
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your positional sizing after considering the logical stop loss points & risk reward that you have
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practice it will just be a normal thing.U
fixed based on your trading capital. Initially it may be little hard to look all at once however with

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Hack is to stick to few stocks or instruments until you get used to them before trying out other

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instruments.

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23,24

Trading Psychology &

Understanding Emotional Trading
 Trading Psychology & Emotional Trading
"There have been multiple studies regarding the mindset of a trader and the fascinating thing is it is not

N G
unable to control emotions while trading"

D I
because of the lack of technical knowledge that many traders lose. It is because of lack of trading discipline and

R A
Below mentioned point are the reason why 90% of traders are making losses even though there is so many working
strategies, technical analysis courses available online (free / paid)
T
A L
One can be a profitable trader even with 50%
accuracy in his technical analysis but follows
T I Even if someone is 90% accurate with his technical
analysis but unable to follow the risk reward,
follow risk management & able to control

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emotions in live tradingN position sizing and unable to control emotions in
live trade will end up losing all his capital

L U
D F
Even though you learn technical analysis perfectly with amazing strategies and you also know perfectly about risk
management - What if your emotions that you face in the live market make you take wrong decisions and you end up

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not following your trading plan? You will end up blowing up your account.

M We know that teaching how to control emotions is not like technical analysis. This is something that you personally
experience for yourselves. But the good news is you can control them. In order to control them first you need to deeply
understand what are the different kind of emotions you go through and what kind of mistakes you make when you go
through them. Once you study how your mind functions it is easy to control it. Lets dive in.
Topic Understanding emotional trading.

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Let's understand each of these emotions in details
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FEAR
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Fear is an emotion that a trader generally encounters immediately after placing a trade. Fear creeps in when the trader observes

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the trade goes slightly against him, causing him to close out his positions. When this happens, traders generally overreact and tend

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to liquidate their holdings causing short spurts of extreme movement in the markets.

Some of the other common scenario’s when a trader encounters Fear are:

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Cut winning position short in fear of giving profits back

Hesitate in initiating the trade because of fear of a prospective loss

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Hang on to losing trades because of fear to take the loss

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Taking trades based on Fear Of Missing Out (FOMO) in Bullish rally / bearish rally

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M I
How to over come Fear in trading gradually

Do not over trade

Do not increase position sizing
Give yourselves a break from trading when you are encountering continuous losses like 3 to 4 days in a row
Topic Understanding emotional trading.

REGRET N G
D I
Regret is an emotion which can come both ways i.e. a trader could regret placing a trade or regret not placing one. Regret may lead a

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trader to get into a trade after initially missing out on it because the stock moved too fast. This leads to a violation of trading discipline
and could lead to trader suffering huge losses. All you need to know is it ok missing few opportunities or having a few bad trades. No

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one can grab all the opportunities the market offers. Once you have obtained this mindset your trading perspective will change.

Some of the other common scenario’s when a trader encounters Regret are:

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Regret of missing out a big rally and you feel taking out some or the other trade in that regret to make some money

Regret of taking small positions in a huge rally

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Regret of taking a trade as it ends up in going opposite direction and giving up that strategy instead of making a small modifications.

Regret of missing out a day in trading

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Regret for averaging losing trades

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Regret of not cutting your losses early

How to over come Regret in trading gradually - You need to tackle this emotion in a slightly different manner - Check out how

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Your regret is indirectly linked to your EGO. Off trading you must work upon reducing your ego based actions in your general life that will

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eventually make its way in trading as well.
Never average your losing trades unless you are doing something related to option hedging.

Do not try for perfection in trading, understand that no trader will be perfect and no strategy will be perfect. Its is all gaining edge in trading.

Appreciate yourselves when you make good trades and do not blame yourselves much when you lose a trade. Loosing is part of the game
Topic Understanding emotional trading.

HOPE
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D I
Trading based on hope is similar to gambling. A number of traders allow hope of recovery prevent them from cutting their losses. When
we create a position in the market, bullish or bearish we start out with a trading plan and end up on hope. When the trade goes against

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us, emotions such as hope enter our mind forcing us to think that if we continue to hold on to the trade a bit longer any loss can get
erased. The only way to avoid it is to recognize the factor of hope in your trading behavior before it destroys your capital.

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Some of the other common scenario’s when a trader encounters Hope are:

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Hope that the trade will go in their direction and taking trade without proper setup

Hope that market acts according to the news

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Hope that atleast they will breakeven and doesn't quit the loosing trade

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Hope that stock behaves the same way as it has done before

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How to over come Hope in trading gradually - There is a saying in trading that HOPE is for HOPELESS people.

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You have to make sure that you follow your trading plan perfectly and no not enter trades when there is no entry trigger.

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DO NOT take up trades solely on news, recommendations from TV / telegram accounts / calls given by popular analyst etc.

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Understand that market doesn't care about your emotions or anyone's emotions for that matter.

Empty the mind and see what market is trying to say - Strictly avoid your biased thinking on any particular stock / Instrument. See and
understand what market is trying to tell you and then just take up trades based on our technical analysis. No not depend on other sources.
Topic Understanding emotional trading.

FRUSTATION
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D I
It’s an almost classic trading pattern. You lose on a trade, then on another, then on another. Now you’re angry: What’s with the market
today! So you jump in again fast, and now you hold the trade too long, and it goes sour. Now you’re really mad, and you keep on
making hasty decisions.

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Some of the other common scenario’s when a trader encounters Frustation are:
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You are getting consecutive SL hits and not you are so angry and take revenge trade on market.

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You have fixed daily / weekly targets and when you do not achieve those you'll get frustrated and may end up taking wrong trades / take

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higher positions in order to recover loss / achieve the targets in the time period remaining.

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You keep sitting In front of your system waiting for good setup, when you are so bored that you did not get any trade opportunity you get

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frustrated and impatient, as a result you end up taking some random trade without proper setup.

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How to over come Frustration in trading gradually - The emotion which plays MAJOR role in BLOWING UP your account is FRUSTATION.

D F
This emotion is also linked to your EGO and you need to strictly start practicing below hacks to overcome this issue.

When you hit consecutive stop losses and you reached max loss threshold for the day, IMMEDIATELY close the system / Phone (uninstall

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trading app if required) and go out. Or get into other work. Go indulge yourselves in another activity like talking to family members /
watching movies / videos etc. It might seem funny but trust me you will blow up your account if you don't do this.

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Learn to be patient, if you do not see any setup working, give yourself a trading holiday and do the above mentioned tasks.

DO NOT try to recover your losses on the same day by doing revenge trading. Remember that market will be there forever but your
trading account will not be. Remember that market is ocean and you are a small boat which can turn upside down anytime.
Topic Understanding emotional trading.

HAPPINESS
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D I
When we are in a good mood it signifies an absence of danger and thus we don’t feel the need to think critically. We can make rash, ill
thought out decisions when we are in a good mood. This is because when we are happy, we’re more likely to think about our potential

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gains and by thinking about them we also believe they are more likely to happen.

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Some of the other common scenario’s when a trader encounters Happiness are:
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After consecutive winning streak, you tend to become undisciplined and put on a large trade which may turn out to be a big loss.

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our trading actions.
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When you become over confident because of winning trades you don’t learn from our bad behavior and don’t improve-even if we review

expert trader
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We find it hard to acknowledge our mistakes when we are happy, so we won’t make the progress and improvements we need to become an

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How to over come Happiness in trading gradually - Feeling good and motivated regarding your winning trades is fine but once it turn into

D F
over confidence & Pride, that will become end to trade learning & becomes the starting point of ruining your trading journey.

Take a break after getting consecutive winning trades, do not try to be overconfident about yourself, market won't take much time to

I N
bring your confidence level down.

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When you hit up a jackpot trade and make good money, it is your mind's general tendency to take up another big trade thinking that even if
you loose you'll breakeven and have nothing to lose. Remember that there is nothing worse than giving away the profits back to the market.
So you must avoid those trades that you take when you are happy, if you want to take up another trade after huge win trade make sure the
amount you are risking is not more than 10% of the profits earned in the previous trade.
Topic Understanding emotional trading.

GREED N G
D I
Greed is the excessive desire for profits. Greed tempts the trader to stay in a profitable trade longer than is fundamentally or

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technically advisable in an attempt to squeeze out the last penny. Greed among traders is generally observed in a bull market when
traders trade throwing caution to the winds. We all have had at latest one trade wherein we held a particular stock way to long and

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then sold out at break even. Greed changes the way we think and prevent us from acting in a rational manner.

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Some of the other common scenario’s when a trader encounters Greed are:

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Missed out huge rally previously after breakout so you want to replicate the same again without analyzing the other factors or trailing SL.

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Taking out huge positions when you encounter perfect pattern that worked for you in recent times.

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Keeping tight SL in order to increase risk reward ratio

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D F
How to over come Greed in trading gradually

You need to tell yourself that winning small consistently is much better than aiming for a big amount by taking big risk.

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Remember that luck will not favor you all the time, there could be some random patterns / indicators that worked for you by luck giving

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you handsome profit. DO NOT chase those patterns. Stick to the patterns / strategies that you have planned for yourselves. Even though
you want to try out a new pattern, try it by taking small positions.

You should always follow exit strategy rules while placing / trailing the stop loss. We will be discussing regarding the same in this course later.