Risk Management Cheat Sheet

Risk Cheat Sheet: The working rules of risk management are: risk a small, fixed fraction of capital per trade (0.5 to 2% is a common heuristic, not a law), size positions from the stop distance rather than conviction, keep total portfolio heat capped, and cut losses at the stop without exception. This matters because losses are asymmetric, a 50% drawdown needs a 100% gain to recover, so avoiding deep losses protects the compounding that builds an account. Every figure below is a heuristic or a standard formula for education only, never a promise of profit.

This cheat sheet gathers the core rules, tables and formulas of trading risk management in one place. Read it as a set of defaults to reason from, not as guarantees: the percentages are heuristics, the formulas are standard definitions, and none of them promise a profitable outcome. The through-line is capital preservation. Because losses compound against you, the trader who never takes a fatal loss is the one still standing to use whatever edge they have. See the Position Sizing Cheat Sheet for the sizing methods in full.

The core risk rules

• Preserve capital first. The primary job is survival, not maximising this month's return. You cannot compound an account you have blown up.
• Size from the stop, not from conviction. Decide where the idea is wrong, then let that stop distance determine quantity.
• Define risk before entry. Know the rupee loss if the stop is hit before you place the order, never after.
• Cut losses at the stop. Honouring the stop is the single habit that most protects capital; moving it wider to avoid a loss is how small losses become large ones.
• Cap total open risk. Limit portfolio heat so a cluster of correlated stops cannot cause a severe drawdown.
• Beware leverage and gaps. A stop caps loss only when the market trades through it; an overnight gap can jump straight past it.

Loss asymmetry: the gain needed to recover

Recovering a loss requires a larger percentage gain than the loss itself, because the gain compounds on a smaller base. The formula is: gain to recover = 1 ÷ (1 − loss) − 1. This asymmetry is the mathematical reason capital preservation matters more than home runs.

The table is not linear. Past roughly 30% the required recovery accelerates, and beyond 50% it becomes punishing. Keeping drawdowns shallow is far easier than digging out of a deep one.

Position sizing formula

The percentage-risk model sizes every trade to a fixed money risk:

Where Capital is account equity in ₹; Risk% is the fraction risked per trade (e.g. 0.01 for 1%); Stop distance is the gap in points between entry and stop; and Point value is the ₹ per point per unit (the lot multiplier). Sizing this way means a wider stop automatically takes a smaller position, holding the money at risk constant.

India example. Capital ₹5,00,000, risk 1% = ₹5,000. Trading Nifty with a lot of 75 (₹75 per point) and a 40-point stop, the risk per lot is 40 × 75 = ₹3,000. Quantity = 5,000 ÷ 3,000 ≈ 1.67, so you round down to 1 lot to stay within the risk budget. Figures are illustrative only.

Reward-to-risk and breakeven win rate

For a given reward-to-risk ratio R, the win rate at which a strategy breaks even (before costs) is: breakeven win rate = 1 ÷ (1 + R). Any win rate above this line is profitable in expectancy; the higher your reward-to-risk, the lower the win rate you can tolerate.

This ignores costs. Brokerage, STT, GST, exchange fees and slippage raise the real breakeven win rate, especially for high-turnover strategies, so treat the table as an optimistic floor.

Risk of ruin: the intuition

Risk of ruin is the probability that a run of losses drains capital below the level at which you can keep trading. You do not need the exact formula to use its three levers:

• Bet size dominates. Halving the risk per trade lowers the probability of ruin dramatically; doubling it raises it just as fast. This is the single most powerful control.
• Edge matters, but less than size. A positive expectancy lowers ruin, but even a good edge cannot save an account that bets too large, because a bad-enough streak is always possible.
• Negative expectancy means eventual ruin. With a losing system, smaller bets only delay the end; no sizing rule turns a negative edge positive.

The practical takeaway: keep per-trade risk small enough that a realistic losing streak, say 10 to 15 losses in a row, is survivable with capital and composure to spare. This is why professionals trade well below the mathematically optimal Kelly size.

Portfolio heat guidance

Portfolio heat is the total capital at risk if every open position hit its stop at once. Individual trade limits are not enough, because several positions can lose together, especially when correlated.

• A common heuristic caps total portfolio heat near 6% of equity, roughly a handful of trades at 1 to 2% each.
• Treat correlated positions as one bet. Five bank stocks or several long index-delta option trades move together and pool their risk.
• Count undefined-risk positions (naked options, futures) by their realistic adverse move, not their margin, and add a gap buffer.
• When heat is near its cap, a new trade requires closing or trimming an existing one, not simply adding exposure.

Pre-trade risk checklist

Run through this before every order. If any answer is no, the trade is not yet ready.

• Where is the stop, and what is the rupee loss if it is hit?
• Is that loss within my per-trade risk limit (e.g. 1% of capital)?
• Does adding this trade keep total portfolio heat under its cap?
• Is this position correlated with what I already hold?
• What is the reward-to-risk, and does it clear my minimum?
• What happens if the market gaps against me overnight or through a circuit?
• Have I accounted for brokerage, STT and slippage in the plan?
• Am I acting on my rules, or on FOMO, boredom or a wish to recover a prior loss?

Key metric formulas

Every figure and rule on this page is educational and evergreen. None of it forecasts returns or removes the possibility of loss; risk management improves the odds of survival, not the certainty of gain.

Frequently asked questions

Last reviewed 12 July 2026. Educational content only — not investment advice.