Stops and position sizing

Most traders decide what to trade and then how much almost by feel. Professionals do it the other way round: the risk is fixed first, and the quantity falls out of a simple calculation. This lesson is that calculation.

Where the card's stop level comes from

For each stock, Live Flow gathers the prices intraday traders commonly watch:

• today's open, high and low
• today's VWAP and point of control (lessons 5 and 6)
• yesterday's high, low and close
• the two edges of the order block, if there is one (lesson 7)

For a bullish stock, Support 1 is the nearest of these below the price and Support 2 the next one; Target 1 and Target 2 are the nearest above. For a bearish stock it flips: Resistance 1 and 2 above, targets below. Levels closer to the price than 0.2 × the stock's 5-minute ATR (or 0.05% of the price, whichever is larger) are skipped: a stop a few paise away is not a stop. If there aren't enough real levels nearby, Live Flow fills the gap with a level 1.5 "steps" away for a stop and 2 steps away for a target, where a step is the 5-minute ATR (at least 0.1% of the price). These levels are redrawn every minute.

Support 1 is where the idea behind the card is in doubt. Many traders place the actual stop a little beyond it, to allow for noise and the spread.

The sizing formula

Decide your risk per trade in rupees first. A common rule is 0.5–1% of your trading capital. Then:

Quantity = risk per trade ÷ (entry price − stop price)

Lot sizes change the picture

Stock futures trade in lots fixed by NSE, so you can only buy whole multiples of the lot size. Using the example above, suppose the lot size is 1,250 shares:

• One lot with a ₹5 stop risks 1,250 × 5 = ₹6,250, more than your ₹5,000 limit.
• You can't trade 1,000 shares of the future. The honest options are: skip the trade, accept a smaller risk per trade elsewhere, or use an instrument where the size fits.

What you should not do is take one lot and quietly move the stop closer than the level to make the numbers work. That just makes the stop more likely to be hit by normal noise.

Bought options have a different risk shape: the most you can lose is the premium you paid (plus costs), but prices can fall fast and liquidity varies by strike (lesson 8). Size them by the premium you are prepared to lose.

The daily loss limit

Fix a daily loss limit, for example three times your risk per trade. When you reach it, stop trading for the day. It protects you from the spiral that SEBI's numbers hint at: a loss, then a bigger trade to win it back, then a bigger loss.

Rules that make stops work

1. Set the stop before you enter, and size from it.
2. Never move a stop further away to avoid being stopped out.
3. Allow for slippage: in fast markets a stop-loss market order can fill past its level (lesson 8).
4. If the card's Support 1 changes after you enter, decide in advance whether you will trail your stop to the new level (lesson 10). Don't decide in the heat of the moment.