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All About Day Trading Risk Management Plus Free Tool in 5 Points

Hello Traders, and welcome to this very practical and interactive article on Day Trading Risk Management. I’m sure, by the end of this article, you will be in a better position to understand what is Risk Management in Intraday Trading, What are the key Risk Management factors, and how to manage your risk per trade, and take your positions accordingly.

Also, I am providing a link in this article for an Excel-based Risk Management Calculator, which can be downloaded for free and is ready to use. Hope this helps.

So let’s get going…

Day Trading Risk Management

1. What is Day Trading Risk Management?

Intraday trades might turn into a gamble if any trade is not planned. By planning, I mean there should be proper and defined Entry and Exit criteria, no matter the trade is going in, or against our favor.

While planning your trade, Risk Management comes into the role to minimize our losses. Traders cannot ensure their profit in every trade 100%, but definitely, they can control or minimize their losses if the trade runs against them.

2. Why is Day Trading Risk Management Important?

Thumb rule of Intraday Trading is that there is no such Holy Grail that could churn profits only in every trade. Every trader faces losses. But the trader who lasts in the Stock Market is the one who follows Risk Management in every trade, looks forward for opportunities that fulfill their trade setup criteria, but keeps their losses in control, or to the minimum.

3. What are some important Day Trading Risk Management Factors?

Here are some very important factors that affect Risk Management:

  1. Define an Entry Point of a trade as per your Intraday Strategy.
  2. Define a well placed Stop Loss while getting into a trade. The Stop Loss should not be too close or too far from the entry point
  3. Trail the Stop Loss if the trade is going in trader’s favor.
  4. Take diversified trades amongst different sectors that are as per the primary Index trend.
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4. Day Trading Risk Management Video

Adam Khoo’s video on Day Trading Risk Management

5. Day Trading Risk Management Calculator / Technique

In this section, I will explain the Risk Management method that I personally follow. But before we start, here are 2 important points I want to share.

First, the credit of this Risk Management Technique goes to Mr. Adam Khoo, a Singapore-based Trader, and mentor. I learned about this fabulous technique of Risk Management for every trade from one of his educational videos.

Second, you can download this free Excel-based Risk Management Calculator by clicking here.

So to start with, here is a screenshot of the Risk Management calculator, and I will explain every element of this calculator. If you have still not downloaded it, then please click here to get it for free.

Image: Intraday Risk Management Calculator

The idea of his calculator is to 1) LIMIT your trade risk up to a certain limit that you have decided, and 2) give you a clear Target price for your trade based on your trade Entry price and your Risk to Reward ratio.

So here’s how we use it:

  1. Enter the trading capital you have in your hand.
  2. Then enter the percentage of your trading capital that you are willing to risk in every trade. For example, it could be 0.5%, 1%, 2%, 5% and so on. But I would recommend to set this value at 1%, so that you risk lesser capital in your initial trades. As you get comfortable and confident with your trading style, you can increase this percentage to any level you want.
  3. After you enter the Risk Percentage, the actual Amount at risk in every trade is calculated automatically in Risk Amount section.
  4. Then, you have to set the RISK to REWARD ratio that you want to apply in your trades. This ratio could be 1:1, 1:2, 1:3 an so on. Here, first part oft he ratio is the Risk, and second part is the reward you plan. For beginners, it’s always better to start off with 1:1 or 1:2 max until you are confident with your trading style.
  5. After setting the Risk to Reward ratio, we get two sections, “Long” and “Short”. So if you are taking a Long trade (Buy first, Sell later), then go for the “Long” section. If you intend to take a “Short” trade (Sell first, Buy later – within same trading session), then go for “Short” section. Since parameters for both trades are the same, so I will refer to these parameters once only.
  6. Now as per your trade, Long or Short, enter the Trade Entry Price in “CMP” section.
  7. Enter the trade Stop Loss in the “Stop Loss” section. Please note, that in Long section, Stop Loss should be lesser than the CMP, and in Short section,Stop Loss should be greater than the CMP.
  8. CMP minus the Stop Loss will give the Trade Risk amount per share in “Trade Risk” section.
  9. Trade Risk per share amount is divided by the Risk Amount we calculated in Step 3. This division will give us the exact Quantity of shares that we can buy or sell based on our Entry Price, Stop Loss Price, and percent risk that we are willing to take per trade.
  10. Based on your Risk to Reward ratio set in step 4, and Target Entry Price, your Profit Target is calculated in “Target” section.
  11. Target Percent section will tell you how much percent gain you are aiming for in your current trade from the Target Entry Price.
  12. “Profit” and “Profit %” section tells you how much of profit you will earn if the target is hit, and what will be the profit percentage on your capital in hand.
  13. “Loss” and “Loss %” section tells you how much of maximum loss you can bear if the trade goes against you, and what will be the loss percentage on your capital in hand. Loss percent will be the same as the Risk percentage set by you in the second step.
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And this is it, guys.

As you must have noticed, changing the CMP and Stop Loss values may give you different results in the Quantity and Profit sections, but your Loss percentage section will remain the same as you set initially. And this is how you can limit your losses to the extent that you want.

Do comment, or drop me a liner if you like this approach. This works well for me. Hope you find it helpful also.

Ending the article with a note of Thanks to Mr. Adam Khoo once again guys.

Also, do read my blog on Creating Watchlist for Intraday Trading as well if you are looking forward to some info on Watchlist creation.

May the GODS OF TRADE be with you… 🙂


The Winning Leap Author

Prashant P. Chauhan

Author @ The Winning Leap

Meet Prashant Pratap Chauhan, the savvy founder behind The Winning Leap, a hub for sharp financial insights and expert analysis in the realm of finance blogging.

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