Risk Management 101: The 1% Rule for Traders and Investors

You can pick winning stocks. You can time entries perfectly. But if you don't manage risk, one bad trade can wipe out months of gains. Risk management isn't sexy—but it's the difference between surviving and thriving in the markets.

The #1 Rule: Never Risk More Than 1-2%

This is the golden rule of risk management. On any single trade, never risk more than 1-2% of your total portfolio.

The 1% Rule in Action

Portfolio size: ₹10,00,000

1% risk: ₹10,000 per trade

What this means:

• If you buy a stock at ₹100 with stop-loss at ₹95 (5% risk)
• You can buy ₹2,00,000 worth (₹10,000 ÷ 5% = ₹2,00,000)
• If stopped out, you lose only 1% of portfolio
• You can survive 100 consecutive losses before going broke

Position Sizing Formula

Calculate Your Position Size

Formula:

Position Size = (Portfolio × Risk%) ÷ (Entry Price - Stop Loss Price)

Example:

• Portfolio: ₹10,00,000
• Risk: 1% = ₹10,000
• Entry: ₹200
• Stop Loss: ₹190 (5% below entry)
• Position Size: ₹10,000 ÷ (₹200 - ₹190) = ₹10,000 ÷ ₹10 = 1,000 shares
• Total investment: ₹2,00,000 (20% of portfolio)

Stop-Loss Orders: Your Safety Net

A stop-loss order automatically sells your position if price drops to a certain level. It's your insurance policy against catastrophic losses.

✓ When to Use Stop-Loss

• Individual stock positions
• Swing trades (days to weeks)
• Volatile stocks
• When you can't monitor daily

⚠ When to Skip Stop-Loss

• Long-term holds (10+ years)
• Index funds
• DCA positions
• Very low volatility stocks

Where to Set Your Stop-Loss

Strategy	Stop-Loss Level	Best For
Tight	2-5% below entry	Day trading, low volatility
Moderate	5-10% below entry	Swing trading (recommended)
Wide	10-20% below entry	Position trading, high volatility
Technical	Below support level	Chart-based traders

Diversification: Don't Put All Eggs in One Basket

Even with perfect position sizing and stop-losses, you need diversification. Spread your risk across multiple positions.

Beginner Portfolio (₹5-10L)

• 5-10 positions (10-20% each)
• Focus on index funds + 2-3 individual stocks
• Easier to manage, lower complexity

Intermediate Portfolio (₹10-50L)

• 10-20 positions (5-10% each)
• Mix of index funds, individual stocks, sectors
• Optimal balance of diversification and manageability

Advanced Portfolio (₹50L+)

• 20-30 positions (3-5% each)
• Diversified across sectors, geographies, asset classes
• Maximum risk reduction

Risk Management Saves Your Portfolio

Educational Example

Two traders, same picks, different risk management

Trader A: No Risk Management

• Portfolio: ₹10,00,000
• Buys ₹5,00,000 of one stock (50%)
• No stop-loss
• Stock drops 40%
• Loss: ₹2,00,000 (20% of portfolio)
• Needs 25% gain to recover

Trader B: Proper Risk Management

• Portfolio: ₹10,00,000
• Buys ₹1,00,000 of same stock (10%)
• Stop-loss at 10% below entry
• Stopped out at 10% loss
• Loss: ₹10,000 (1% of portfolio)
• Needs 1% gain to recover

The Difference

Same stock, same loss. Trader A lost 20% of portfolio and needs months to recover. Trader B lost 1% and can recover in days. Risk management is the difference between survival and ruin.

This is a hypothetical scenario using historical market data for educational purposes only. Past performance does not guarantee future results.

FAQ

Why only 1-2% risk per trade? Isn't that too conservative?

It seems conservative until you do the math. With 1% risk, you can survive 100 consecutive losses. With 10% risk, you're broke after 10 losses. The 1% rule ensures you stay in the game long enough to profit from your winners.

What if my stop-loss gets triggered and the stock rebounds?

This happens! It's the cost of insurance. You'll get stopped out sometimes and miss rebounds. But the alternative—holding through 50% losses—is far worse. Accept small losses to avoid catastrophic ones.

How many positions should I have?

10-20 positions is optimal for most investors. Less than 10 = too concentrated (single-stock risk). More than 30 = too diluted (hard to manage, diminishing returns on diversification). Sweet spot: 15 positions.

Should I use stop-losses on index funds?

No. Index funds are for long-term holding (10+ years). They will drop 30-50% during crashes, but they always recover. Stop-losses on index funds lock in losses. Just hold through volatility.

What's more important: stock picking or risk management?

Risk management, by far. You can pick mediocre stocks with great risk management and still profit. But even the best stock picks will ruin you with poor risk management. Protect your downside first, then focus on upside.

Protect Your Capital First

The market will always be there. Your capital won't if you don't protect it.

Rule 1

1-2% risk per trade

Rule 2

Use stop-losses

Rule 3

Diversify 10-20 positions

Learn Stop-Loss Strategy →

Risk Management 101: The 1% Rule That Saves Portfolios

Key Takeaways

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