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Risk comes before reward. Here is how position size limits what a single trade can cost you. Education only.
From The Markets Shelf · Book 7: Risk Before Reward · 5 min read · Chapter 3
Education only. Not investment advice.ProShelf is not registered with SEBI as an investment adviser or research analyst. These books give no tips, calls or recommendations to buy or sell anything. Charts use invented example data or past events at least three months old. Trading, especially futures and options, can lose you money: SEBI's own studies found that about 9 in 10 individual F&O traders made losses (FY22–FY24).
The number of shares follows from two numbers you already have: your rupee risk and the distance to your exit. Shares = rupee risk ÷ (entry − exit). Then check the position against a few ceilings.
The idea
The formula
Rupee risk. From Chapter 2: e.g. 1% of ₹5,00,000 = ₹5,000.
Risk per share. Entry price minus exit price (for a buy). Use your planned limit entry, not the last traded price.
Shares. Rupee risk ÷ risk per share, rounded down.
Check the ceilings. Position value against capital, liquidity and gap limits (this chapter).
The method
Three worked examples
Trade (invented)
Entry
Exit
Risk / share
Shares (₹5,000)
Position value
% of ₹5 lakh
Sindhu Cables
₹240
₹228
₹12
416
₹99,840
20%
Pench Paper
₹1,250
₹1,190
₹60
83
₹1,03,750
21%
Tapi Textiles
₹96
₹90
₹6
833
₹79,968
16%
Three very different share prices and exit distances; the same ₹5,000 risk; positions between 16% and 21% of the account. That consistency is the point.
The method
Ceilings: capital, liquidity, gaps
The formula can produce a position that is too big in other ways. Three ceilings catch this.
Ceiling
Rule of thumb
Why
Capital
No single position above about 20–25% of the account
Concentration: one share should not decide your year
Liquidity
No position above about 5% of the share's average daily value traded
So you can exit in a day (Book 6)
Gap
A gap of, say, 30% through your exit should cost no more than about 5% of the account
Fraud, results, regulators
Why it matters
Tight exits and huge positions
Because size depends on the exit distance, a very tight exit produces a very large position. This is where many traders' worst losses begin.
Exit on Sindhu Cables
Risk / share
Shares for ₹5,000
Position value
% of account
₹228 (sensible)
₹12
416
₹99,840
20%
₹232
₹8
625
₹1,50,000
30%
₹236 (tight)
₹4
1,250
₹3,00,000
60%
Use it
Adding to a winner
Some traders add to a position as it moves in their favour. Done carefully, this can increase gains on the best trades without increasing risk.
Move the first exit up first. Only add after the original exit has moved to near break-even or above (a trailing exit, Book 3).
Size the addition as a new trade. With its own exit and its own rupee risk.
Check total risk and the ceilings. The combined position must still fit capital, liquidity and gap limits.
Try it yourself
Questions from the worksheet: Position size sheet
Fill in one row for every planned trade before you place the order.
Then apply ceilings for capital (20–25%), liquidity (5% of daily value) and gaps.
Tight exits create huge positions; place exits where the idea is wrong, then size.
Position size
The number of shares in a trade.
Risk per share
Entry minus exit.
Gap ceiling
The largest position a severe gap could hit without exceeding a set loss.
This article is adapted from the book. Examples marked “Example” use invented names and numbers; company stories are based on public sources listed in the book. Education only: not investment, tax or legal advice.
