ATR stops and position sizing

What ATR is

The Average True Range (ATR), from J. Welles Wilder, is how much a stock typically moves in a day, in rupees. Each day's "true range" is the largest of: today's high minus low, today's high minus yesterday's close, and yesterday's close minus today's low (so gaps count). ATR is the average of that over 14 days.

A ₹1,000 stock with an ATR of ₹20 moves about 2% a day. A ₹1,000 stock with an ATR of ₹60 moves about 6%.

Why stops based on ATR

A fixed stop, say 5% below the buy price, is far too tight for a jumpy stock (normal noise will hit it) and too loose for a calm one. An ATR stop adapts: this site places the stop 1.5 ATR below the entry and the target 2.5 ATR above it.

Position sizing: the 1% rule

Decide the most you are willing to lose if the stop is hit, as a share of your capital, and work backwards:

Shares = (capital × risk %) ÷ (entry − stop)

Example: capital ₹1,00,000, risk 1% = ₹1,000. Entry ₹500, stop ₹470, so ₹30 risk per share. Shares = 1,000 ÷ 30 = 33 shares (₹16,500 of stock).

Notice the result: a wider stop means fewer shares, so the loss at the stop is always about the same. That is what makes losing streaks survivable. Ten stops in a row at 1% risk cost about 10% of the capital; at 10% risk they would cost about two-thirds of it.

A second cap

Very tight stops can produce huge positions. A sensible rule also caps one trade's money, for example at 20% of the capital, and checks the stock trades enough every day to get out at the stop.