S3 E6 : RISK MANAGEMENT : STOP LOSS, RISK-REWARD RATIO
“Like Insurance for Every Trade”
🎯 First: What is Risk in Trading?
When you buy a stock hoping it will go up…
What if it goes down instead?
You lose money.
That possible loss is called risk.
But smart traders don’t panic — they manage it.
🟥 What is a Stop Loss?
Let’s say you buy Tata Power at ₹100.
You tell yourself,
“If it falls to ₹95, I’ll exit. I won’t lose more than ₹5.”
That ₹95 is your stop loss.
It’s like a safety net. If things go wrong, you don’t fall too far.
🧠 Why It’s Powerful:
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You set your maximum loss before the trade.
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It saves your capital for better trades.
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It controls emotions. (No “maybe it’ll go up again” drama)
Think of it like wearing a helmet. You may not crash, but if you do — you're protected.
🟩 What is a Risk-Reward Ratio?
Now let’s go deeper — how much you can gain vs. lose in a trade.
Let’s say:
- You buy a stock at ₹100
- You expect it to go to ₹110 (₹10 profit)
- You set a stop loss at ₹95 (₹5 loss)
This means:
- Risk = ₹5
- Reward = ₹10
- So your Risk-Reward Ratio = 1:2
✅ Ideal Ratio?
Most pro traders prefer 1:2 or higher.
It means:
“Even if I’m right just 50% of the time, I’ll still make money.”
Why?
Because when they win, they win ₹10
When they lose, they lose only ₹5
🧠 Real-Life Example:
You trade Reliance:
- Entry: ₹2,400
- Target: ₹2,460
- Stop Loss: ₹2,370
🧮 Calculation:
- Risk = ₹2,400 - ₹2,370 = ₹30
- Reward = ₹2,460 - ₹2,400 = ₹60
- Ratio = 1:2
Even if 1 out of 2 trades go wrong, you're still in profit.
That’s smart trading — not guessing.
🔁 Why Most Beginners Fail?
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No stop loss (they pray instead)
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No reward plan (just “let’s see”)
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Risking too much on one trade (EMI money = gone)
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Getting emotional (revenge trading, doubling down)
Trading without risk management is like driving blindfolded.
🧠 Recap:
✅ Stop Loss = Pre-decided price to exit if trade goes wrong
✅ It limits your loss and protects your money
✅ Risk-Reward Ratio = Compare how much you risk vs how much you aim to gain
✅ Ideal ratios like 1:2 or 1:3 keep you profitable long-term
✅ Risk management is the heart of smart trading