Understand position sizing formulas

4.3.5 · Stock-Market › How to Trade — Execution & Platforms

YEH EXIST KYUN KARTA HAI: Raw intuition ("100 shares kharido") volatility ko ignore karta hai. ₹50 ka stock ₹5 move kare toh same absolute risk hai jaise ₹500 ka stock ₹50 move kare, lekin dono ke liye alag position sizes chahiye.

Foundation: Risk-Based Position Sizing

FIRST PRINCIPLES SE DERIVATION:

Apna risk budget se shuru karo: Agar aapke paas ₹1,00,000 hai aur aap 2% per trade risk karte ho: $Account Risk = 1, 00, 000 \times 0.02 = ₹2, 000$ KYUN: Yeh aapka maximum acceptable loss hai. Theory mein aap 50 consecutive losses ke baad bhi survive kar sakte ho ruin se pehle.
Risk per share calculate karo: Agar aap ₹100 par kharid rahe ho aur stop-loss ₹95 par hai: $Risk Per Share = 100 - 95 = ₹5$ KYUN: Aapke paas jitne bhi shares hain, har ek aapko ₹5 ke loss ka exposure deta hai agar stopped out ho gaye.
Total risk ko per-share risk se divide karo: $Shares = \frac{2 , 000}{5} = 400 shares$ KAISE: Agar aapke paas 400 shares hain aur aap stopped out ho gaye, toh loss = 400 × ₹5 = ₹2,000 (exactly aapka budget).

Verification: Total position value = 400 × ₹100 = ₹40,000. Agar stopped, aap ₹2,000 lose karte ho (2% of ₹1,00,000 ✓).

Figure — Understand position sizing formulas

Worked example Worked Example 1: Equity Trade

Setup:

Account equity: ₹5,00,000
Risk tolerance: 1.5% per trade
Stock: Reliance ₹2,400 par
Technical stop-loss: ₹2,320 (support level) Step 1: Account risk calculate karo $Account Risk = 500, 000 \times 0.015 = ₹7, 500$ Yeh step kyun? Percentage ko rupees mein convert karna isse concrete banata hai.

Step 2: Risk per share calculate karo $Risk Per Share = 2, 400 - 2, 320 = ₹80$ Yeh step kyun? Agar hypothesis fail ho, toh har share ₹80 ka downside carry karta hai.

Step 3: Position size calculate karo $Shares = \frac{7 , 500}{80} = 93.75 \to 93 shares (round down)$ Round down kyun? Ensure karta hai ki aap kabhi risk budget exceed nahi karte.

Step 4: Total capital deployed calculate karo $Position Value = 93 \times 2, 400 = ₹2, 23, 200$ Verification: Agar stopped out, loss = 93 × ₹80 = ₹7,440 (≤ ₹7,500 ✓). Yeh account ka 1.49% hai.

Advanced Formulas

Common Mistakes

Active Recall Practice

Recall Ek 12-Saal-Ke Bacche Ko Samjhao

Socho tumhare paas ₹100 pocket money hai aur tum apne doston ke saath cricket match outcomes pe bet laga rahe ho. Tum apna sara paisa ek buri bet mein nahi gawaana chahte, hai na?

Position sizing aisa hi hai: Tum decide karte ho "Main sirf ₹2 per bet risk karunga" (₹100 ka 2%). Ab, agar tum India vs. Australia par bet laga rahe ho aur tumhe lagta hai India jeetega, lekin tum sirf 60% sure ho, tum poore ₹2 ek saath nahi lagate. Tum shayad ₹1 apne confident dost ke saath lagate ho (jo jeetne par ₹1.50 de sakta hai) aur ₹1 agli bet ke liye bachate ho.

Stocks mein: Tumhare paas ₹1,00,000 hai. Tumhe ₹100 ka ek stock milta hai lekin tum 100% sure nahi ho, isliye "stop loss" ₹95 par lagate ho (agar ₹95 par aa gaya toh bech doge). Position sizing formula batata hai: "Agar tum ₹2,000 total lose karne ko taiyaar ho, aur har share ₹5 risk karta hai, toh 400 shares kharido." Is tarah, agar tum galat ho, tum exactly ₹2,000 lose karte ho, apna poora ₹1,00,000 nahi!

Connections

Risk Management Fundamentals - Position sizing, risk management ka execution layer hai
Stop Loss Strategies - Aapki stop placement directly position size determine karti hai
Kelly Criterion - Maximum long-term growth ke liye optimal sizing
Leverage and Margin - Borrowed capital position sizing calculations ko kaise amplify karta hai
Portfolio Allocation - Individual trades ki position sizing broader portfolio limits mein fit hoti hai
Average True Range (ATR) - Adaptive position sizing ke liye volatility measure
Expectancy and Win Rate - Aapke system ke statistics Kelly-based sizing inform karte hain
Drawdown Management - Position sizing catastrophic drawdowns se bachata hai

Flashcards

#flashcards/stock-market

What is the basic position sizing formula? :: Position Size (shares) = Account Risk (₹) ÷ Risk Per Share (₹)

What is Account Risk in position sizing?

Account Equity × Risk % per trade (e.g., ₹1,00,000 × 2% = ₹2,000)

What is Risk Per Share?

Entry Price - Stop Loss Price (woh amount jo aap per share lose karte ho agar stopped out ho)

If you have ₹5,00,000, risk 1.5%, buy at ₹2,400 with stop at ₹2,320, how many shares?

Account Risk = ₹7,500; Risk/share = ₹80; Shares = 7,500 ÷ 80 = 93 shares

Why round down position size instead of up?

Ensure karne ke liye ki aap kabhi apna risk budget exceed na karo; round up karne se planned se zyada risk ho sakta hai

What is the Kelly Criterion formula?

f* = [p(b+1) - 1] / b, jahan p = win probability, b = win/loss ratio

Why is full Kelly considered too aggressive?

Yeh growth maximize karta hai lekin high volatility cause karta hai; Half-Kelly equity swings reduce karta hai lekin capital grow karta rehta hai

What is the ATR-based position sizing formula?

Shares = Account Risk ÷ (ATR × Multiplier), jahan ATR stock ki volatility ke saath adapt karta hai

Why is "always buy 100 shares" a mistake?

Alag stocks mein alag risk per share ko ignore karta hai; ₹50 stock with ₹5 stop ka total risk ₹500 stock with ₹50 stop se alag hota hai

What secondary check prevents over-concentration?

Position Value ≤ Portfolio Limit % × Account Equity (typically 20-30% per stock)

Why should stops be set at technical levels, not arbitrary percentages?

Arbitrary stops ya toh bahut tight ho sakte hain (noise se stop) ya bahut wide (capital waste); technical levels actual support/resistance reflect karte hain

In a futures trade, why might you be unable to trade even 1 lot?

Agar Risk Per Lot aapka Account Risk budget exceed kare (e.g., ₹7,500 risk per lot lekin sirf ₹4,000 risk budget)

Core Concepts

Position Sizing Kya Hai?