Sunday, 31 July 2016

Always Control the Risk

The objective of this post is to highlight the importance of controlling the risk.  Risk management in trading is of utmost importance.  Controlling the risk is also important for our survival as a trader.  If we do not have a control over the risk, we will most likely blow up our account, not only once but maybe multiple times. If we blow up the account, we will not be able to trade further.  We will have to get back to earlier profession, work hard, save some capital, gather all the courage and confidence back again and then come back to trading again.  All these things will take lot of precious time of our life, and we may not find the way out of it.  On the other hand, if we are able to survive, there will be always another opportunity and we will be in a better position to utilize that opportunity.   In the game of Cricket, they always say, save your wickets.  If you have wickets on hand, you will always be able to make runs, sooner or later and win.  Here our capital is the wickets, without which we will have to face the defeat.

There are only four possibilities once we are in a trade, as ST sir has always said, Big Profit, Small Profit, Big Loss or Small Loss.  What we need to do is, always avoid Big Loss and keep with us Big Profit, Small Profit, and Small Loss.  Small Profit will take care of Small Loss and we will be left with Big Profit in long run.  This Big Profit can only be achieved if we have a control over the Big Loss, and we have to have that control if we want to succeed in trading.

Now, how to avoid that Big Loss in day trading?

There are different ways to manage and control the risk and most common and efficient way among them is always keeping a Stop Loss for the trade.  For trading Nifty Future, 10 to 15 points of SL is enough.  If the SL is more than this, we just need to simply avoid that particular trade setup and look for another one where we do not have to stretch our SL limit.

Putting just SL alone for every trade is not going to be sufficient for risk control.  We need something more than this.  For that, what I do is, I put a limit on a number of loss making trades.  For example, I will limit a number of loss making trades to 2 in a day.  Once I reach this limit, I will stop trading for that particular day.  I also put the same way, the weekly limit of loss making trades,  My weekly limit is 5 consecutive losing trades per week.  Similarly, I have monthly limit also.  So this way, we have two types of risk control.  By putting SL at every trade we will have control over what maximum we can lose , e.g. 10 to 15 points for NF per trade.  And by limiting the number of loss trades, we ensure we will never run out of capital in a short period of time.

Now, lets have a look at an example where by applying this risk control how we can achieve the objective of survival.

Lets say we have a capital of Rs. 100, 000 (1 lakh) and with that capital we decide to day trade only one lot of Nifty Future.  Now lets say the month and the week start with the 1st and we take two trades and both these trades hit the SL limit.  If the loss is around Rs. 1000 per trade (12 to 15 points), we will suffer a loss of around Rs. 2000 for that day. Once the limit of two SLs a day is reached, we will stop trading for that day.  Next day lets assume the worst case scenario where we lost again in next two trades and our total loss of that week now stands at Rs. 4000.  Now on Wednesday, we are only left with the limit of one more losing trade for that week.  If that happens, we will stop trading for that particular week.  This way, considering the worst case scenario, we will have the maximum loss for that week of Rs. 5000.  We will utilize the remaining time of the week analyzing the mistakes and understanding how we can avoid those mistakes.

Now again for the next week, even if we repeat the mistakes and end up with the losses, we can have another maximum loss of Rs. 5000 for that week.  If that happens, it is better that we stop trading for that particular month and try to understand first what is going wrong with the trading.

This way, we will never lose more than Rs. 10K in a month and our existing capital will  help us sustain for at least 10 months even if all of our trades turn into the losses during that time. I think this time period of around one year is more than enough to understand all the nitty-gritty of markets.

Now to give you some confidence and demonstrate a real example of my survival into the markets with the help of a proper risk management, here are some images of my trade diary from year 2011.

If you go through the diary carefully, you will appreciate the fact that I was always able to control the risk during my learning phase.  At that time, I was trying to do all sorts of things in trading, jumping from one system to another, trying different techniques, all you can think of.  Even while doing all sorts of wrong things, one thing stood out and that was controlling the risk.  I was able to do that with discipline by always entering the SL order immediately after the trade got executed.

Survival should be the first priority.  If we ensure our survival into the markets, there will  always be next big opportunity waiting for us.  Make full use of Mentoring and Video Tutorial.  I assure you will be able to save at least Rs. 1 lakh and 1 year of  struggle into the markets.


  1. Thank You URD for bringing forward one important aspect of trading : RISK MANAGEMENT.
    This is indeed a good strategy which will help new traders to stay in the market despite making successive losses. Will give them enough time to rectify their faults.


  2. URD,

    Great Discipline.. thanks for sharing your notes.
    I remember I also jumping here and there during 2011 time, experimenting all systems under sun .. hehe

    Only thing saved from bankruptcy is my reluctance on NOT to loose more than 10 points no matter what :P

  3. thanks for sharing your notes

  4. I think this is one of the most important lesson to be learnt for a Trader. In fact first lesson. Learn to survive...

  5. Evergreen post for every begginers and successful traders.