Risk management calculator

The rule this page runs

A fixed per-trade risk rule says the rupee loss you take if a trade hits its stop is a set percentage of your current capital. If capital is 10 lakh and the rule is 1 per cent, the loss on a hit stop is 10,000. The stop distance decides the share count: 10,000 divided by the rupees-per-share loss at the stop is the number of shares the rule allows. Everything else on the page is built on that one sentence.

This is a position-sizing rule, not a trade-picking rule. The calculator does not say when to enter, when to exit or which stock to pick. It says how many shares the rule allows for the three prices you choose. If you change the stop without changing the entry or capital, the share count changes in a straight inverse line.

The formulas

Let C be capital, r be risk per cent, E be entry, S be stop and X be the profit-exit.

• Risk amount = C x r / 100. Rupees you accept to lose on this trade.
• Risk per share = |E - S|. The absolute distance from entry to stop, since the sign does not change the loss.
• Shares = floor(risk amount / risk per share). Rounded down so the actual loss never exceeds the risk amount.
• Capital at risk = shares x risk per share. The actual rupee loss at the stop after rounding.
• Position value = shares x E. What the trade is worth at entry; above capital means a leveraged trade.
• Reward to risk = |X - E| / |E - S|. A ratio; 3 means three rupees of reward for every one of risk at this exit.
• Breakeven win rate = 1 / (1 + reward to risk). The win rate at which this reward-to-risk breaks even over many trades of the same shape. A 3-to-1 trade breaks even at 25 per cent wins.

Worked example you can check

Take capital of 10 lakh, a 1 per cent risk rule, entry at 500, stop at 490 and a profit-exit at 530, long. Risk amount is 10,000. Risk per share is 10. Shares are 1,000. Capital at risk is 10,000. Position value is 5,00,000, which is half the capital, so no margin is involved.

Reward per share is 30. Reward to risk is 30 / 10, or 3 to 1. Breakeven win rate is 1 / (1 + 3), or 25 per cent. So if you ran the same shape of trade many times, you would need to be right on about one in four to come out flat.

How each input moves the share count

Capital and risk per cent together set the rupee risk amount. Doubling either doubles the rupee risk and so doubles the share count for the same stop distance. The breakeven win rate and the reward to risk do not depend on either, since both are ratios between the exit and the stop.

Stop distance is the biggest lever. Halving the stop distance doubles the share count; doubling the stop halves it. The stop-distance sweep secondary chart on this page shows that inverse line at 0.5, 0.75, 1, 1.5 and 2 times the current distance. A wider stop keeps the rupee risk constant but takes fewer shares.

Profit-exit does not change the share count. It only changes the reward to risk and the breakeven win rate. Widening the profit-exit raises the reward to risk and lowers the breakeven win rate; narrowing it does the opposite.

Direction (long or short) does not change the arithmetic, because the risk per share uses an absolute distance. It only changes which side of the entry the stop and the profit-exit are expected to sit. If the orientation looks wrong for the side you picked, the page prints a note.

What a run of losses does to capital

A fixed-fractional rule compounds its losses. On the first loss, capital falls by r per cent. On the second loss, capital falls by r per cent of the lower capital. So capital after N consecutive losses is start capital times (1 - r / 100) raised to the power N.

At 1 per cent per trade, 10 losses in a row leave capital at 10,00,000 x 0.99 raised to the 10, or 9,04,382. 20 losses leave 8,17,907. At 2 per cent, 10 losses leave 8,17,073 and 20 losses leave 6,67,608. At 5 per cent, 10 losses leave 5,98,737 and 20 losses leave 3,58,486. The page's line chart draws that decay for the risk per cent you picked and whatever N you want to read from the axis.

This is a reminder, not a forecast. Loss streaks happen at every win rate under 100 per cent. The chart is here so the size of a plausible drawdown is on the page while you set the risk per cent.

What the reward to risk really says

Reward to risk is a per-trade ratio. It does not say whether a trade will win. What it does say is how many wins a sequence of same-shape trades needs to break even. The breakeven line is 1 / (1 + R:R), with no fees or slippage.

A 1-to-1 trade breaks even at 50 per cent wins. A 2-to-1 trade breaks even at 33.33 per cent. A 3-to-1 trade breaks even at 25 per cent. A thin 0.5-to-1 trade needs 66.67 per cent wins. Combine that with the drawdown chart and the answer to a wide stop sits in plain view: more shares means a thicker capital at risk, and a thin reward to risk means a higher win rate to pay for the risk.

What this calculator leaves out

• Brokerage, STT, exchange charges, GST and stamp duty. Use the brokerage calculator to add those; they shift the breakeven win rate a little higher.
• Slippage. The arithmetic treats every exit as filled at the price you entered.
• Overnight and gap risk. A stop can fill below (long) or above (short) the price you set if the market opens past it.
• Variable position sizing by volatility (ATR-based sizing). This is a fixed per-trade rule.
• Portfolio correlation. If you take ten trades on highly correlated stocks, the portfolio risk is bigger than the sum of the single-trade risks implies.
• Order placement. The page is education, not a broker interface.

Frequently asked questions

Courses that teach the subject behind the risk management calculator