Setup Lab India

Famous traders' formulas

The rules behind the best-known trading methods, written as plain formulas with a worked example in rupees. Every example uses made-up numbers. These are methods to study, not trade ideas. How each one actually did on Indian stocks is on the results page.

Contents: risk first (position size, R, expectancy, Kelly) · Minervini · O'Neil · Weinstein · the Turtles · Darvas · Connors · Raschke · ATR.

1. Position size: the 1% rule

Shares = (capital × risk %) ÷ (buy price − stop-loss)

Example: capital ₹1,00,000, risk 1% = ₹1,000. Buy at ₹500, stop at ₹470, so ₹30 risk per share. Shares = 1,000 ÷ 30 = 33 shares (₹16,500 of stock). If the stop is hit you lose about ₹1,000, whatever the stock.

Shares to buy–
Money needed–
Loss if the stop is hit–
Profit at the target–
Reward : risk–

2. The R-multiple

R = (sell price − buy price) ÷ (buy price − stop-loss)

Buy ₹500, stop ₹470 (1R = ₹30). Sell at ₹575: (575 − 500) ÷ 30 = +2.5R. Stopped at ₹470: −1R. More in R-multiples.

3. Expectancy: does a method make money?

Expectancy = win rate × average win − loss rate × average loss (in R)

40% winners averaging +2R and 60% losers averaging −1R: 0.4 × 2 − 0.6 × 1 = +0.2R per trade. A method with a 70% win rate but +0.4R wins and −1R losses: 0.7 × 0.4 − 0.3 × 1 = −0.02R: it slowly loses. Break-even win rate = average loss ÷ (average win + average loss). More in expectancy.

4. Kelly criterion: how much to bet

Kelly % = W − (1 − W) ÷ P, where W = win rate and P = average win ÷ average loss

W = 40%, P = 2: 0.40 − 0.60 ÷ 2 = 10% of capital at risk per trade. Most traders use a quarter or half of Kelly, because the real win rate is never known exactly. Kelly of 0 or less means the method has no edge: do not trade it.

5. Mark Minervini: the trend template

All 8 must be true before a stock is even considered:

  1. Price above the 150-day and 200-day moving averages.
  2. The 150-day average above the 200-day.
  3. The 200-day average rising for at least 1 month.
  4. The 50-day average above the 150-day and the 200-day.
  5. Price above the 50-day average.
  6. Price at least 30% above its 52-week low.
  7. Price within 25% of its 52-week high.
  8. Relative strength in the top 30% of the market (RS 70+).

Example: 52-week low ₹300, high ₹620, price ₹590. 590 ≥ 1.3 × 300 = 390 ✓ and 590 ≥ 0.75 × 620 = 465 ✓.

VCP (volatility contraction pattern): each pullback near the high is smaller than the one before (for example −20%, −10%, −5%) while volume dries up; the buy point is the breakout from the last, tightest range. See the VCP guide.

6. William O'Neil: buy points and the 7-8% rule

Buy point = the "pivot" (top of a base), on volume at least 40-50% above average
Do not buy more than 5% above the pivot
Sell any stock that falls 7-8% below your buy price, without exception

Example: pivot ₹1,000. Buy between ₹1,000 and ₹1,050. Bought at ₹1,020, the stop is about ₹1,020 × 0.92 = ₹938. O'Neil's CAN SLIM also asks for strong quarterly and yearly earnings growth, a market leader and a rising market.

7. Stan Weinstein: stage 2

Stage 2 = price breaks above its base and above a RISING 30-week (150-day) moving average, on at least 2× volume

The four stages: 1 base, 2 advance (buy), 3 top, 4 decline (avoid). Example: the 30-week average is ₹410 and rising, the base top is ₹450; a close at ₹462 on twice the normal volume is a stage-2 breakout.

8. The Turtles: breakouts and "N"

Buy on a new 20-day high (system 1) or 55-day high (system 2)
N = 20-day average true range (ATR)
Unit size = 1% of capital ÷ N (in rupees per share)
Stop-loss = 2N below the entry

Example: capital ₹5,00,000, N = ₹12. Unit = 5,000 ÷ 12 = 416 shares. Bought at ₹300, stop = 300 − 24 = ₹276.

9. Nicolas Darvas: the box

Box top = a high not exceeded for 3 days; box bottom = the low after it, not broken for 3 days
Buy when price closes above the box top; stop just below the box bottom

Example: box ₹180 to ₹200. Buy above ₹200, stop ₹179. Risk ₹21 a share.

10. Larry Connors: RSI(2)

Buy when the 2-day RSI is below 10 AND the price is above its 200-day average
Sell on the first close above the 5-day average

A short, sharp dip inside an uptrend, held for about 1-3 days. See the RSI(2) guide.

11. Linda Raschke: the holy grail

ADX(14) above 30 (a strong trend), price pulls back to the 20-day EMA, buy when it turns up again

Example: ADX 35, 20-day EMA ₹840; price dips to ₹845 and closes back at ₹858: a holy-grail setup.

12. ATR: setting stops by how much a stock moves

True range = the largest of (high − low), |high − previous close|, |low − previous close|
ATR(14) = the average true range of the last 14 days
Stop = entry − 1.5 × ATR; target = entry + 2.5 × ATR (the rule tested on this site)

Example: entry ₹500, ATR ₹20: stop ₹470, target ₹550. More in ATR stops and position sizing.