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🛡️ Investment Risk Management

Position Sizing & Stop Loss Strategies for Capital Protection

❌ Traditional Risk Management Failures

Hope + Prayer + Averaging Down = Portfolio Destruction

❌ What Destroys Portfolios:

  • No position sizing rules - Betting too much on single ideas
  • No stop losses - Riding losers hoping they'll recover
  • Averaging down - Throwing good money after bad
  • Emotional decisions - Panic selling at the bottom
Hard Truth: Most investors lose money not because they pick bad stocks, but because they risk too much on each trade and don't know when to cut losses. One bad position can wipe out years of gains!

✅ Systematic Risk Management

Position Sizing Rules + Stop Loss Discipline = Capital Preservation

✅ What Preserves Capital:

  • Risk-based sizing - Never risk more than you can afford to lose
  • Systematic stop losses - Cut losses at predetermined levels
  • Portfolio heat limits - Total portfolio risk never exceeds limits
  • Emotionless execution - Follow rules regardless of feelings
Wealth Protection: Proper risk management can prevent 80% of major portfolio losses while preserving capital for future opportunities. The first rule of investing is "Don't lose money"!

🎧 Investment Risk Management Masterclass

Master position sizing and stop loss strategies for capital protection

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📈 What you'll learn:
• Position Sizing Rules: Risk-based position sizing using the 1% rule, volatility adjustment, and portfolio heat calculations.
• Stop Loss Strategies: Technical, fundamental, and time-based stop losses with proper placement and adjustment techniques.
• Risk Management Systems: Portfolio-level risk controls, correlation limits, and systematic execution frameworks.
• Capital Preservation: Behavioral discipline techniques to overcome emotional biases and maintain long-term wealth building.

🎯 Risk-Based Position Sizing

Scientific approach to determining how much to risk on each trade

📊 The 1% Rule

Rule: Never risk more than 1% of portfolio value on any single trade

  • ₹10 lakh portfolio = Maximum ₹10,000 risk per trade
  • ₹1 crore portfolio = Maximum ₹1 lakh risk per trade
  • Conservative: 0.5% risk | Aggressive: 2% risk

⚡ Volatility-Adjusted Sizing

Formula: Position Size = Risk Amount ÷ (Entry Price - Stop Loss Price)

  • Higher volatility stocks = Smaller position sizes
  • Lower volatility stocks = Larger position sizes
  • Adjust for beta and standard deviation

🔥 Portfolio Heat Management

Rule: Total portfolio risk should never exceed 10% of capital

  • Sum of all position risks ≤ 10% of portfolio
  • Helps survive multiple simultaneous losses
  • Prevents portfolio destruction in market crashes

📈 Kelly Criterion Application

Formula: f = (bp - q) ÷ b, where f = fraction of capital to risk

  • b = odds received on the wager (reward/risk ratio)
  • p = probability of winning
  • q = probability of losing (1-p)

🛑 Stop Loss Strategies

Systematic approaches to limiting losses and protecting capital

Technical Stop Loss

5-15%
Based on chart patterns and support levels

Fundamental Stop Loss

20-30%
Based on business deterioration

Time-Based Stop Loss

3-6 Months
Exit if thesis doesn't play out

Portfolio Stop Loss

10-20%
Overall portfolio drawdown limit

🎯 Stop Loss Placement Rules:

Technical Stops: 1-2% below key support levels like 20-day/50-day moving averages

Volatility Stops: 2 × ATR (Average True Range) below entry price

Percentage Stops: 10-15% for large caps, 20-25% for small caps

🛡️ Stop Loss Benefits:

Stop losses limit maximum loss per trade, prevent emotional decision-making, and preserve capital for future opportunities. The key is setting them before entering the trade and sticking to them religiously.

📋 Risk Management Decision Matrix

Systematic framework for risk assessment and position sizing

Risk Factor Low Risk Medium Risk High Risk
Market Cap Large Cap (>₹20,000 cr) Mid Cap (₹5,000-20,000 cr) Small Cap (<₹5,000 cr)
Volatility (Beta) Beta < 0.8 Beta 0.8-1.2 Beta > 1.2
Position Size 2-4% of portfolio 1-2% of portfolio 0.5-1% of portfolio
Stop Loss 8-12% below entry 12-18% below entry 18-25% below entry
Time Horizon 1-3 years 6-18 months 3-12 months

🎯 Practical Risk Management Implementation

Real-world application with calculation examples

⚠️ Fatal Risk Management Mistakes:

  • No predefined stops: Setting stops after the trade moves against you
  • Moving stops lower: Giving losing trades "more room"
  • Risking too much: Betting 10-20% on single ideas
  • Ignoring correlation: Multiple positions in similar stocks

✅ Professional Risk Management:

  • Plan before entry: Set position size and stop loss before buying
  • Stick to rules: Execute stops mechanically, no exceptions
  • Track portfolio heat: Monitor total risk exposure daily
  • Review and adjust: Assess risk management effectiveness monthly

💡 Risk Management Calculation Example:

Portfolio Value: ₹10,00,000
Risk per Trade: 1% = ₹10,000
Stock Entry Price: ₹500
Stop Loss Price: ₹450 (10% below entry)
Risk per Share: ₹500 - ₹450 = ₹50
Position Size: ₹10,000 ÷ ₹50 = 200 shares
Investment Amount: 200 × ₹500 = ₹1,00,000
Portfolio Allocation: 10% of portfolio

🔑 Key Takeaway:

Risk management is not about avoiding risk—it's about taking calculated risks with defined downside. The goal is to stay in the game long enough to benefit from compound growth. As Warren Buffett says: "Rule #1: Don't lose money. Rule #2: Don't forget rule #1."

This analysis uses The Finmagine™ Stock Analysis & Ranking Methodology to evaluate and rank stocks by Financial Strength, Growth Potential, Competitive Edge, Management Quality, and Value.

Learn more about our comprehensive methodology →

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