Reblog: Know Your Range aka How to Set Your Stop Loss ⋆ 5-To-9 Trader


There is nothing more frustrating than getting stopped out of a trade only to watch the price go back to the initial direction you were trading in the first place.

It’s grating, I know.

Assets, like animals, have different types of characteristics. Some are fast, some are slow, some jump high, some jump low. Understanding the behaviours and patterns of your chosen assets will help you set your stops at reasonable levels.

With this post, I’ll share a simple method of placing your stops in a way that is realistic and decreases the chances of getting hit every single time.

The Concept of Stopping Distances

If you are driving at 50 km/h (~31 mph), do you know how much safety distance you have to maintain between you and the vehicle in front of you ?

What about when you’re cruising at 120kmh (~75mph), will you still be keeping the same distance?

Well, duh!” I hear you say.

The typical stopping distances chart below is a case in point:


Your stopping distance should be adjusted to your vehicle’s size and driving speed. For example, larger vehicles weighing 40 tonnes need a greater stopping distance than a compact car that is significantly smaller in weight and size.

A similar concept can be applied in trading.

Basing your stop loss solely on a hard and fixed number (e.g. x number of pips / x number of points) is like using the same stopping distance FOR EVERY SINGLE VEHICLE. There is a smarter way to calculate your stop loss and the first step is to know the range of your asset.

This is akin to knowing the size of the vehicle you’re driving – it makes it easier for you to get a good idea of what a reasonable stopping distance would be. Knowing the trading range of your asset, or the “average true range” (ATR) as we call it, also helps you select a sensible stop level which can decrease the chances of your trade being stopped out, provided that your bias was set in the right direction.

How to Calculate the Average True Range

So here is a simple step-by-step guide on how to calculate the average true range of any asset (be it stocks, commodities, currencies, etc)

  1. Get the historical data for your asset. You will need the data of the open, high, and low numbers .This data set usually always comes as a package called open, high, low, and close (OHLC). You can download these numbers from the following free resources:
  2. Subtract the low price of the day from the high price of the same day. The result you get is what you call a “True Range”. This tells you how much the asset moved in a day.
  3. To get the average true range (ATR) for a certain period, you just repeat step number 2 for the number of days you want to calculate the range for. Then you get the average number of the true ranges within your specified period.  Below is an example for a 20-day ATR, which is equivalent to a whole trading month:

    Calculating the average true range of an asset tells you how much the asset has moved within a particular period

  4. You can then calculate the daily ATR in form of a percentage as follows:a. You add the true range of the latest closed trading day and the trading day priorb. You divide the result by 2c. Then you divide the number by the open level of the latest trading day

    The result you get tells you how much the asset is expected to move on an average day. For example, if your calculated ATR is 1.37 %, that means that the asset is expected to move by 1.37% from the opening price. This is how it would look like on a spreadsheet format:

    Calculating the average true range of an asset expressed in percentage

  5. Once you have the percentage worked out for the different time frames you need (e.g. 3 days, 10 days, 20 days, 1 year, 10 years etc), you can use this % as a stop loss level.In the above example, if we are entering a trade say, at $985 (the numbers on the spreadsheet are expressed in cents), and we have calculated a 20-day ATR of 2.15 %, then we can set our stop level at $964 (2.15% of $985 is $21, so we subtract $21 from our entry level to calculate the stop level based on the ATR).

You can apply this technique in many different variations. For example, you can use a 3x ATR as a stop level if you know that your asset is a “wild” one, i.e. extremely volatile. Or you can round up the calculated ATR to the nearest 5 for good measure. Or you can even use the ATR to target a profit level.

Voilá. Now you know how to calculate your “stopping distance”.

Will this guarantee that your stop levels won’t get hit?

There are no guarantees for anything and there is certainly no one way of setting the right stop level and nailing it every single time. But I would think of it like this:

Most trades almost always start off with a loss, so when you enter a trade, what you’re essentially doing is you give your position some space to prove itself. This “space” is predetermined by the stop loss you set. Once your position exceeds this “space”, that’s when you know you need to cut it as you will be damaging your trading account or portfolio otherwise.

Giving your trades the appropriate amount of “space” is key as you will otherwise be depriving it of the chance to prove itself. This is where knowing how to calculate your asset’s average true range can help you.

And remember to always trade responsibly.

The original post appears on and is available here.

Sensex ends 270 points lower, Nifty below 9,850 as Infosys cracks 9%

The Sensex settled at 31,524, down 270 points, while the broader Nifty50 quoted 9,837, down 66 points at close. The BSE Midcap index settled 0.1% lower, while BSE Smallcap index shed 0.5%.

The benchmark indices snapped a three-session long winning streak, as Infosys cracked after Vishal Sikka’s resignation as MD & CEO, although rivals such as Tata Consultancy Services gained.

According to a BSE filing, Sikka will be Executive Vice-Chairman while UB Pravin Rao is the Interim-MD and CEO.

Infosys saw its sharpest decline since April 12, 2013, down 9.6% to Rs 923. In intraday trade, the stock fell as much as 13% to Rs 884.

But the domestic markets still logged their sixth weekly gain in seven, though they remained below the record highs hit on August 2.

The market breadth, indicating the overall health of the market, was strong. On the BSE, 1,534 shares declined and 1,002 shares rose. A total of 122 shares remained unchanged.

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Reblog: When Should You Move a Stop Loss to Breakeven?

forex breakeven stop loss

This week’s question comes from John, who asks:

When should a trader move a stop loss order to breakeven?

This is one of the more common questions among Forex traders. It’s also one of the most challenging to answer because it depends on several variables.

And it makes sense that it’s a common dilemma. After all, who doesn’t want to be in a risk-free trade?

But believe it or not, moving a stop loss too soon can be more harmful than taking a full loss.

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Reblog: Indian Infrastructure – A decade in the making

The global investment landscape today looks quite unexciting. Consumers in developed countries have been maxed out for the better part of a decade. Notwithstanding the recent optimism in the US, it is highly unlikely that consumption growth will reaccelerate. The best scenario one can hope for is that consumption growth settles at a 1% to 2% rate and that fears of contraction subside.

Emerging markets face a completely different problem: China. China has been the engine of growth in emerging markets for the last two decades but the Chinese engine is now sputtering. China made a miraculous transformation of its economy by building infrastructure that is the envy of even the developed world. It fueled this growth with massive amounts of debt (most of it domestic, thankfully) and by borrowing growth from the future by conspicuous overbuilding. The problem with a capital or fixed hyper-investment model is that one cannot stop. If one stops then the entire economy stalls and crashes.

China has been adding capacity in roads, railways, ports, power, steel, aluminum etc. Each of these sectors depends on the other sector’s “growth” to keep itself going. If one sector stops adding to capacity, the feedback loop stalls capacity addition in all other sectors. China has reached the point where the discourse has shifted from growth of capacities to utilization and shut down of capacities. For example, Chinese steel capacity exceeds 1 billion tonnes or about 50% of global installed steel capacity. China produces 825 million tonnes of steel. Chinese aluminum capacity exceeds 45 million Continue Reading

Sensex at five-week low, Nifty settles at 9,710, down 350 pts for the week

The markets settled at their five-week lows as PSU banks and metal stocks tanked, while escalating tensions between the United States and North Korea continued to drive investors away from risk assets.

The Nifty PSU Bank index dipped nearly 5% after Oriental Bank, Union Bank of India and State Bank of India fell 5% each post disappointing earnings for the June quarter. Meanwhile, volatility index India VIX hit its highest in six months, suggesting market participants expect major volatility on the Nifty over the next thirty days.

Benchmark indices ended the session and the week on a negative note, with indices seeing big cuts in the day’s trade.

The Sensex closed down 317.74 points at 31213.59, while the Nifty ended lower by 109.45 points at 9710.80. The market breadth was negative as 1,003 shares advanced against a decline of 1,525 shares, while 135 shares were unchanged.
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Reblog: How to Cut Losses and Let Winners Run

Loss Aversion – Cut Losses Short & Let Winners Run

If you’ve been trading for a while, you’ve probably heard the following ubiquitous mantra of trading: “Cut Your Losses Short & Let Your Winners Run”.

Why Should You?

Stocks can literally go to zero. It happened many times before and will happen in the future, regardless of how big the company is.

MANY oil and coal companies recently filed for chapter 11 bankruptcy and their stocks got delisted. You may also remember Lehman Brother and General Motors. What happens when your stock falls off a cliff and gets delisted? You simply lose all the money you invested in that stock.

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Reblog: Philip Fisher’s 15 point checklist for investing in stocks

We recently came across Philip Fisher’s checklist for investing in stocks in Common Stocks and Uncommon Profits and Other Writings and thought it was worth reproducing here. Fisher was one of the most famous investors in his story. As his son, Kenneth (renowned as an investor in his right) wrote in his obituary:  “Among the pioneer, formative thinkers in the growth stock school of investing, [Philip] may have been the last professional witnessing the 1929 crash to go on to become a big name. His career spanned 74 years, but was more diverse than growth stock picking. For decades, big names in investing claimed Dad as a mentor, role model and inspiration.”

15 Points to Look for in a Common Stock

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Sensex snaps 2-day losing streak; Nifty ends week above 10,050; IOC, HPCL zoom

The benchmark indices erased entire losses to settle near day’s high thanks to gains in metal, oil & gas and banking stocks, while the pharma index was the sole sectoral loser. Almost all constituents of the Nifty pharma index, which shed as much as 2.5% intraday, were in red.

The Sensex ended at 32,325, up 87 points, while the Nifty50 closed at 10,066, up 52 points. Both indices settled the week marginally higher.

Metals and oil marketing companies also led support to the market but the correction in Reliance Industries and healthcare stocks capped gains. Equity benchmarks opened lower and remained range bound till recovery in later part of the session.

In the broader market, the BSE Midcap outperformed to gain 0.6%, while the BSE Smallcap index settled little changed.

The breadth, indicating the overall health of the market, was negative. On the BSE, 1,388 shares fell and 1,198 shares rose. A total of 172 shares remained unchanged.

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Reblog: Candlesticks – Forget Candlestick Patterns – This is All You Need To Know

Understanding candlestick patterns goes far beyond just remembering and recognizing certain formations. Many books have been written about candlestick patterns, featuring hundreds of different formations that supposedly provide secret information about what is going to happen next.

Truth be told, it will make no difference to your trading performance whether you know what the Concealing Baby Swallow, Three Black Crows or Unique Three River Bottom are.

What really matters is that you understand what the candlesticks in front you of you tell you about price structure, trend strength, buyer/seller dynamic and the likely path for future price movements. 

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Reblog: Cochin Shipyard IPO Review

Cochin Shipyard Ltd. (CSL) is a PSU enjoying “Miniratna” status and the largest public sector shipyard in India in terms of dock capacity, as of March 31, 2015, according to the CRISIL Report. CSL caters to clients engaged in the defense sector in India and clients engaged in the commercial sector worldwide. In addition to shipbuilding and ship repair, it also offers marine engineering training. As of May 31, 2017, the company has two docks – dock number one, primarily used for ship repair (“Ship Repair Dock”) and dock number two, primarily used for shipbuilding (“Shipbuilding Dock”). CSL’s Ship Repair Dock is one of the largest in India and enables it to accommodate vessels with a maximum capacity of 125,000 DWT and Shipbuilding Dock can accommodate vessels with a maximum capacity of 110,000 DWT.

Now CSL is in the process of constructing a new dock, a ‘stepped’ dry dock (“Dry Dock”). This stepped dock will enable longer vessels to fill the length of the dock and wider, shorter vessels and rigs to be built or repaired at the wider part. It is also in the process of setting up an International Ship Repair Facility (“ISRF”), which includes setting up a shiplift and transfer system. In the last two decades, company has built and delivered vessels across broad classifications including bulk carriers, tankers, Platform Supply Vessels (“PSVs”), Anchor Handling Tug Supply vessels (“AHTSs”), launch barges, tugs, passenger vessels and Fast Patrol Vessels (“FPVs”). The company is currently building India’s first Indigenous Aircraft Carrier (“IAC”) for the Indian Navy. It has also grown ship repair operations and is the only commercial shipyard to have undertaken repair work of Indian Navy’s aircraft carriers, the INS Viraat and INS Vikramaditya.

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