# Risk Management Formula Sheet

Formulas and example calculations for position sizing and risk. Use for quick revision and live trading.

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## Core Formulas

### 1. Dollar Risk

```
Dollar Risk = Account Size × Risk%
```

**Example:** Account = $40,000, Risk = 1%\
Dollar Risk = $40,000 × 0.01 = **$400**

***

### 2. Risk Per Unit (per share / per contract / per lot)

**Stocks (per share):**

```
Risk Per Share = |Entry Price − Stop Price|
```

**Example:** Entry = $50, Stop = $47\
Risk Per Share = |50 − 47| = **$3**

**Forex (per lot):**\
Risk in points × pip value per lot = risk per lot.\
Example: 50 pips × $10/pip (standard) = **$500** per standard lot.

**Futures:**\
Risk in points × point value = risk per contract.\
Example: 5 points × $20/point = **$100** per contract.

***

### 3. Position Size (units)

```
Position Size = Dollar Risk / Risk Per Unit
```

**Stocks example:**\
Dollar Risk = $400, Risk Per Share = $3\
Shares = $400 / $3 = **133 shares** (round down: 130)

**Forex example:**\
Dollar Risk = $400, Risk per 0.1 lot = $50\
Lots = $400 / $50 = **0.8 lot** (or 8 mini lots)

**Futures example:**\
Dollar Risk = $400, Risk per contract = $100\
Contracts = $400 / $100 = **4 contracts**

***

## Summary (Stocks)

| Step              | Formula                      |
| ----------------- | ---------------------------- |
| 1. Dollar risk    | Account × Risk%              |
| 2. Risk per share | \|Entry − Stop\|             |
| 3. Shares         | Dollar risk / Risk per share |

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## Risk:Reward (R:R)

```
R:R = (Target − Entry) / (Entry − Stop)   for longs
R:R = (Entry − Target) / (Stop − Entry) for shorts
```

**Example (long):** Entry 100, Stop 97, Target 106\
R:R = (106 − 100) / (100 − 97) = 6/3 = **2** (1:2)

**Minimum:** Aim for **≥ 1:1.5** or **1:2**.

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## Expectancy (per trade, in R)

If you risk 1R per trade:

```
Expectancy = (Win Rate × Avg Win in R) − (Loss Rate × Avg Loss in R)
```

With fixed 1R loss: Avg Loss in R = 1. So:

```
Expectancy = (Win Rate × Avg Win in R) − (1 − Win Rate)
```

**Example:** Win rate 50%, avg win 2R\
E = (0.5 × 2) − 0.5 = **0.5 R** per trade (positive edge).

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## Kelly Criterion (optional)

**Full Kelly fraction:**

```
f* = (p × b − q) / b
```

* p = win rate, q = 1 − p
* b = win/loss ratio (avg win / avg loss in same units)

**Example:** p = 0.5, b = 2\
f\* = (0.5 × 2 − 0.5) / 2 = **0.25** (25% of bankroll—too high in practice)

**Use ¼ or ½ Kelly** for lower volatility, or ignore and use **fixed 0.5–2%** risk per trade.

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## Max Drawdown (rough)

No exact formula. With **1% risk** and **50% win rate**, expect **strings of 5–10** losses.\
Rough guide: **10–20%** drawdown over a year is common. Size so you can **tolerate** that.

**Recovery:** After a 20% drawdown, you need **25%** return to break even (0.80 × 1.25 = 1.0).

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## Quick Reference Table

| Item           | Formula or value                       |
| -------------- | -------------------------------------- |
| Risk per trade | 0.5–2% (e.g. 1%)                       |
| Dollar risk    | Account × Risk%                        |
| Position size  | Dollar risk / Risk per unit            |
| Min R:R        | 1:1.5 or 1:2                           |
| Expectancy     | (Win% × Avg win R) − (Loss% × 1) > 0   |
| Max daily loss | e.g. stop after 2%                     |
| Stop placement | Beyond structure/level (not arbitrary) |

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*Full detail:* [*08 — Risk Management*](https://github.com/nishchalnishant/TradingOverview/blob/main/Revision/stock-market-analysis/technical-analysis/handbook/08-risk-management/README.md)*.*