Risk Management in Trading: Stop Loss, Risk Reward Ratio and Trading Psychology
By Tejas Wankhede (Tejas Sir), commodity trader and founder of The Millionaires Floor, Nashik. Updated .
Quick answer
Risk management in trading means controlling how much you can lose on each trade and each day so that a losing streak never ends your trading. The core rules are: risk 1 to 2 percent of capital per trade, always use a stop loss, aim for a risk reward ratio of at least 1:2, and stop trading after a daily loss limit.
Why risk management matters more than strategy
Even a good strategy has losing streaks. If you risk 10 percent per trade, five losses in a row can cost about 40 percent of your capital. If you risk 1 percent, the same streak costs about 5 percent. Risk management keeps you in the game long enough for your strategy's edge to show.
Tejas Sir lost 30 percent of his first capital in six days in 2021 because he had no rules. That experience is why every course at The Millionaires Floor teaches risk management before any entry setup.
How to place a stop loss
Place the stop loss at the price that proves your trade idea wrong, such as just below the support you bought from, not at a random rupee amount. Then size your position so that hitting that stop costs only your fixed risk. Never move a stop loss further away once the trade is open.
What is a good risk reward ratio?
Risk reward ratio compares how much you risk to how much you aim to make. At 1:2 you risk ₹1,000 to make ₹2,000. With a 1:2 ratio you can be right only 40 percent of the time and still be profitable before costs. Most rule-based traders look for at least 1:2.
- 1:1 needs a win rate above 50 percent to profit before costs.
- 1:2 needs a win rate above about 34 percent.
- 1:3 needs a win rate above 25 percent.
Position sizing formula
Position size = rupee risk per trade ÷ (stop loss in points × rupee value per point per lot). Example: ₹3,000 risk, 20-point stop on a mini contract worth ₹10 per point = ₹200 risk per lot, so up to 15 lots. Always round down and check margin.
Trading psychology: the habits that protect capital
Good trading psychology is mostly about routines: a written plan before the session, a fixed daily loss limit, a trade journal and no revenge trading after a loss. Fear and greed are normal. Rules decided before the market opens stop those emotions from making decisions for you.
Frequently asked questions
What is the 1 percent rule in trading?
It means you never lose more than 1 percent of your trading capital on a single trade. With ₹1,00,000 capital, the maximum loss per trade is ₹1,000.
Should I always use a stop loss?
Yes. A stop loss defines your maximum loss before you enter. Trading leveraged commodity futures without one can cause losses larger than planned.
How do I control emotions while trading?
Decide entries, stops, targets and a daily loss limit before the session and follow them mechanically. Keep a journal and review it weekly.
Learn this step by step with Tejas Sir
Join the online commodity trading course from anywhere in India, or the offline trading classes in Nashik. Plan your trades with the free position size and risk reward calculator.
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Disclaimer: This guide is for education only and is not investment advice. Trading in commodity derivatives involves substantial risk of loss. The Millionaires Floor does not provide tips or guaranteed returns. Read the full risk disclaimer.