What is Risk Management in Trading? Stop Loss, Position Sizing & Capital Protection

Overview:

Risk management is the foundation of successful trading. Even the best strategy can fail without proper risk control.

Core Concepts:

1. Stop Loss:

- A price level where you exit a trade to avoid bigger losses.

- Helps control emotional trading.

- Example: Buy at ₹200, Stop Loss at ₹195.

2. Risk-Reward Ratio:

- Comparison of potential profit vs. potential loss.

- Ideal ratio is 1:2 or higher (risk ₹1 to gain ₹2).

3. Position Sizing:

- How many shares/lots to buy based on your risk appetite.

- Never risk more than 1-2% of your capital in a single trade.

4. Capital Allocation:

- Don’t put all your money in one trade or one asset.

- Diversify and preserve capital.

Simple Tip:

“Focus on protecting capital first, profits will follow.”