Risk Management

There are three parts of risk management.

1. Max Threshold Limit

2. R Multiple Theory

3. PCR Formula

Max Threshold Limit In simple terms, risk threshold is the maximum amount of risk that an individual can take. In
other words, it is the risk-bearing capacity or the risk appetite of an individual. Risk threshold differs across individuals in
different age brackets and depends on several parameters including income and liabilities, among others. We will
understand the risk threshold for different individuals in various age groups.
A drawdown is simply the movement from a
peak to a trough, whereas traders consider a
loss relative to the amount of the initially
deposited amount as capital.

Example:
Suppose that you have 100000 Rupees in trading account. How much Draw Down you want to see.
Capital = 100000/-
Max Draw Down= 10000/-
Your wrong probability. How much trade can go
Suppose that your winning accuracy is 50% can
wrong in a string?
you make money?
Trade Probability wrong
Let’s suppose your accuracy is 50-50 but your 1 = 0.5
reword is more like 1:2 then you can make 2 = 0.5*0.5=0.25
money. 3 = 0.5*0.5*0.5=0.125
4 = 0.5*0.5*0.5*0.5=0.0625
But you defined yours Maximum Draw Down
5 = 0.5*0.5*0.5*0.5*0.5=0.03
limit is not more than 10000/- then in which
6 = 0.5*0.5*0.5*0.5*0.5*0.5=0.015
condition what you will do.
Probability Theory Says: vxj fdlh Event esa yxr gksus
1. Find Wrong Probability : How much trade dk Chance 2 izfr’kr ls de jg tkrk gS rks mls wrong
can go wrong in a string (yxkrkj). tkuk cgqr Difficult gks tkrk gSA ;kfu lHkh 6&6 Trade
2. if your Right Probability is 50% then wrong wrong pys tk; ml fLFkfr esa tgkW vkidh wining
probability is also 50% Accuracy 50 izfr’kr gS bldh Chance ek= 1-5 izfr’kr jg
tkrk gSA mlds myV 6 eSls 1 Trade lgh gksus dk Chance
98-5 izfr’kr gks tkrk gSA

IMPRESSION:- According this strategy when your wining accuracy is 50% and your Draw Down limit is 10000/- and your 5 trade going
wrong in a string/row then you maximum risk capacity is 10000/5= 2000/- per Trade. 2000₹ is 2% of your Capital. So your maximum
threshold limit is 2% if you want to increase his/her Max Threshold limit then you will have to increase you Draw down limit or your
wining accuracy.

Risk Management Theory | This Notes Created By Nawaid Alam 1

If Wining Accuracy is 60% how will calculate Max Threshold Limit.
According to Probability theory if the wining probability is 60% then the probability of going wrong is 40% In such a situation, there is a
possibility of 4 trade going wrong in a row/string.
Example:-
 Draw Down Limit/ Wrong Trade = Max Threshold Limit per trade /Capital x 100 = Max Threshold limit in
Percentage.
 10000/4= 2500/ 100000 X 100 = 2.5% is Max Threshold Limit of Capital.

Accuracy in % No. of wrong trade probability in a row

80% 2
70% 3
60% 4
50% 5
40% 3

How to find wining Accuracy percentage: You can back testing or front testing a particular strategy. If you want to choose
front testing you can 25-30 trade in a particular strategy after that count how many trades went right and how many went
wrong after that find out its percentage.

R-Multiple Theory: R-Multiple also known as the "R-Multiple Ratio" or "Risk Multiple," is a concept used in trading and
investing to measure the potential return of a trade or investment relative to its initial risk. It's a way to evaluate the
reward-to-risk ratio of a trade in order to assess its potential profitability and riskiness. R-Multiple is a useful tool because
it encourages traders to focus on trades that offer a favorable risk-to-reward ratio. By consistently aiming for trades with
positive R-Multiples, traders can potentially improve their overall trading performance and better manage their risk
exposure. (R-Multiple ges crkrk gS fd vius y{; rd igwWpus ds fy, gesa fdruh Quantity ysuh pkfg,½

Example:
Tom a Person His Capital is: 100000/- Accuracy = 60%
Max DD Limit: 15000/- Max Threshold limit = 3.75%
Risk and Reward 1:1 He wants 40% Return
ekuk fd Tom ,d O;fDr gS ftldk Wining Accuracy 60% gS rFkk lky esa og yXkHkx 100 Trade dj ysrk gS ftldk risk and Reward 1:1
gS ,oa budk Max Threshold Limit 3.75 gS rFkk og lky dk yxHkx 40% Return dekuk pgrk gS] rks Tom dks vius y{; dks Achieve
djus ds fy, mls per trade fdruk dk Risk ysuk ij ldrk gS bls Calculate dSls djsaxs&
 ;fn Tom lky esa 100 Trade djrk gS rks muds 60% Accuracy ds fglkc ls 60 trade lgh ,oa 40 Trade Wrong tkus dh laHkkouk
curk gS&
 bl izdkj Tom dks 100 Trade djus ij Net to Net 20 Trade ;kfu 20R dk 100 Trade
Profit feyrk gS&
60R -40R
 R (Risk per Trade) dk Value fudkyus ds fy,&
100 = 60R – 40R = 20R
R = Aspect Target / No. of Profitable Trade
R = 40% / 20 = 2

Risk Management Theory | This Notes Created By Nawaid Alam 2

 R = 2% ;kfu Tom dks vius 40% Return Achieve ds fy, per trade vius Capital (100000) dk 2% Risk ysdj Trade djuk ijsxkA
tks fd Tom ds }kjk fu/kkZfjr Max Threshold limit 3.75% ds vUnj gSA bl izdkj Tom vius y{; dks izkIr dj ysxkA

ysfdu ;fn fdlh dkj.k o’k Tom lky esa 100 Trade ugha dj ikrk gS] vkSj og lky esa 50 Trades
ek= 50 Trade gh djrk gS] fdUrq mudk Target ogh ;kfu 40% gh gS] rks ,slh fLFkfr esa
D;k djuk ij ldrk gS& 30R -20R
 R = 40% / 10 = 4% 50 = 30R – 20R = 10R
 ;kfu Tom dks izfr trade 4% dk Risk ys dj pyuk ijsxk tks fd
mlds }kjk fu/kkZfjr Max Threshold limit 3.75% ls vf/kd gks tkrk gS tks mls 4% Risk ysus dk allow ugha djrk gSA
 ;fn Tom 4% ;k mlls vf/kd 5% per trade Risk ysdj trade djrk gS rks muds }kjk fuZ/kkfjr Max Draw Down Limit
c<+ tk;sxk vkSj ,slh fLFkfr esa ;fn yxkrkj 4 Trade wrong pyk tkrk gS rks og vius Capital dk 20% loss dj ldrk
gSA
 ;fn Tom 5% per trade Risk ysdj gh trade djuk pkgs rks ,slh fLFkfr mls djuk pkfg, fd&
1- Tom vius Draw Down Limit dks increase djsA
2- vius Accuracy izfr’kr dks increase djsaA
3- Risk and Reward dks Increase djsA

HOW TO FIND R-MULTIPLE IN A SINGLE TRADE

 Tom a Person
 His Max threshold is 3.75%
 His Accuracy is 60% and
 Risk and Reward is 1:1.5
 He is 100 trade in a year
How much tom’s R-Multiples in a single trade?

 Tom lky esa 100 Trade djrk gS rks mldk 60 Trade Right ,oa
40 Trade wrong tkus dh laHkkouk curk gSA
100 trades
= 100 Trade djus ij 60 right trade feyrk gS and 40 wrong trade.
= 60 right trade x 1.5R = 90R
= 40 wrong trade x 1R = 40R +60 trade Gain -40 trade lose
= 90R – 40R = 50R *1.5R *1.0R
= 100 trade djus ij 50R feyrk gS] rks 1 trade ij 90R - 40R = 50R
100 = 50R
1= 100/50R = 0.5R 1 = 0.5R
1 = 0.5R
Note:
o Never Trade in a such strategy where R-Multiple is less than 0.2

R-Multiple Grading
0.2R Average
0.3R Good
0.4 Super Strategy
0.5 Holy Grail
Risk Management Theory | This Notes Created By Nawaid Alam 3
For Practice
Rajesh a Person
His Max Threshold Limit is 2.5%
His Accuracy is 50% and Risk and
Reward is 1:1.5
He makes 60 Trades in a year.
He wants 30% return per annum
So the question is that, how much risk he can take a single trade.
Solution
o Suppose that Makes 100 trade in a year with the accuracy is 50%
o So his 50 trades are gone positive and 50 trades are negative.
o 50 positive trades X 1.5R = 75R
o 50 negative trades X 1.0R = 50
100 trades = 75R - 50R = 25R
100 trades = 25R
1 trade = 25R/100 = 0.25R
Since Rajesh Makes 60 trades in a year so 60 x 0.25R = 15R
He wants 30% return per annum so 30/15 = 2, R= 2%
Rajesh can take 2% risk a single trade.

For Example
o Rajesh have 20000/- Capital
o To achieve 30% return per annum he will take 2% risk per trade.
Rajesh find a trade of Paytm
Paytm – Buy Price - 895
Stop loss- 795
The Question is that, how many Shares he will buy?
According to PCR Formula he will buy 27 paytm shares. But how, lets explain below.

Risk Management Theory | This Notes Created By Nawaid Alam 4

 Now here will be applying 3rd level of risk management PCR formula.
PCR Formula is P= C/R
P: Position – (How much position (quantity) you wants take) PCR formula dgrk gS fd Position
C: Cash lose (How much cash you can lose) fdruh ysuh gS og Depend djrk
gS “C” Cash lose fdruk gS ,oa “R”
R: Risk [How much risk (stop loss) per shares]
Risk per Share fdruk gSA
For Apply PCR Formula, first you have to find Value of “C”
Rajesh already decided 2% risk per trade of his capital as per Max threshold limit.
C = 2% of his capital, so “C” Value is = 4000

 2nd you have to find Value of “R”

 Suppose that you find 1 trade through High Beta strategy like Paytm
You find Buy Price - 895
And you also find Stop loss - 750
o To find “R” Value = Buy Price – Stop loss
o R = 895 – 750 = 145
o R Value is = 145
Now we have found the value of “C” and “R”
C = 4000,
R = 145
P= C/R
P = 4000/145 = 27
Position = 27 shares approx

Risk Management Theory | This Notes Created By Nawaid Alam 5