Preservation of Capital over Profit Chasing
The difference between a retail gambler and an institutional operator is how they view risk. A gambler opens a chart and asks, 'How much money can I make if I buy here?' A professional asks, 'How much can I lose if this trade fails?'
The Mathematics of Drawdown
Drawdowns are asymmetrical. If you lose 10% of your account, you need a 11.1% gain to break even. If you lose 50% of your account, you need a 100% gain just to return to your starting capital. This is why strict risk parameters are mandatory.
The 1% Rule
Never risk more than 1% (or at most 2%) of your total account balance on a single trade. If you have a ₹1,00,000 account, your maximum risk per trade should be ₹1,000.
Calculating Position Size
Position size is a function of stop loss distance, not gut feeling. The formula is:
Position Size = Account Risk Amount / Stop Loss Distance (in points/pips)
If your stop loss is wide, your lot size must be small. If your stop loss is tight, your lot size can adjust higher, keeping the actual cash risk identical at ₹1,000.