A mathematical approach to determining exactly how many lots you should trade on any given setup.
The Gambler's Flaw
Retail traders determine their position size based on how much money they have in their account, or how "confident" they feel about a trade. This is gambling.
Professional position sizing is derived purely through mathematics, based on the distance to the invalidation point (stop-loss).
The 2% Rule
Never risk more than 1% to 2% of your total trading capital on a single trade.
The Formula: Position Size (Quantity) = (Total Trading Capital * 0.02) / (Entry Price - Stop Loss Price)
Practical Example
- Capital: ₹5,00,000
- Max Risk (2%): ₹10,000
- Setup: BankNifty ATM Call
- Entry Price: ₹300
- Stop Loss Price: ₹250
- Risk per unit: ₹50
Calculation: ₹10,000 / ₹50 = 200 quantities (approximately 13 lots of BankNifty at lot size 15).
If you are "highly confident" in a trade where the stop loss is very wide (e.g., ₹100 risk per unit), you MUST reduce your lot size to maintain the ₹10,000 maximum risk threshold. Discipline in sizing is what keeps you alive during drawdowns.
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