Advanced Concepts
The mathematics and advanced concepts behind our strategy
This page covers advanced mathematics and concepts. If you're new, start with Getting Started and Strategy first.
Understanding R-Multiples
What Is "R"?
R stands for your Initial Risk on a trade. It's the amount you stand to lose if your stop loss is hit.
Example:
- • Account size: $10,000
- • You risk 0.3% = $30 per trade
- • Your R = $30
R-Multiples Table
| Outcome | R-Multiple | Dollar Result (R=$30) |
|---|---|---|
| Stopped out | -1R | -$30 |
| Small loss | -0.2R to -0.5R | -$6 to -$15 |
| Standard win | 3R to 5R | +$90 to +$150 |
| Home run | 10R to 50R+ | +$300 to +$1,500+ |
Why Think in R?
Standardization
A $500 loss on a $50K account equals a $50 loss on a $5K account. Both are -1R.
Emotional Control
When you know your average win is 4R and average loss is 0.8R, you won't panic during a 5-trade losing streak.
Forces Discipline
You calculate your exit BEFORE you enter. You don't ask 'How much can I make?' but 'Where is my stop?'
Position Sizing
The Golden Rule
Never risk more than 0.25-0.30% of your total capital on a single trade.
This is the foundation of everything. If you break this rule, nothing else matters.
The Position Sizing Formula
Position Size = Risk Amount ÷ (Entry Price - Stop Loss Price)
Example:
- • Account: $10,000
- • Risk per trade: 0.3% = $30
- • Entry price: $50
- • Stop loss: $48 (4% below entry)
- • Risk per share: $50 - $48 = $2
- • Shares to buy: $30 ÷ $2 = 15 shares
- • Total position value: 15 × $50 = $750 (7.5% of account)
Why Tight Stops Enable Bigger Positions
| Stop Distance | Risk Per Share | Shares (with $30 risk) | Position Value |
|---|---|---|---|
| 2% ($1 on $50 stock) | $1 | 30 shares | $1,500 (15%) |
| 4% ($2 on $50 stock) | $2 | 15 shares | $750 (7.5%) |
| 10% ($5 on $50 stock) | $5 | 6 shares | $300 (3%) |
Tighter stops = larger positions = bigger impact when you win. This is why we use 3-5% stops instead of 10-15%.
Selling Into Strength
The 7-11 Rule
Starting when a stock reaches 7x ATR% above the 50-day SMA, take profits at each ATR% multiple:
This is mechanical. No prediction. No discretion. Just execution.
Other Exit Signals
Vertical price action
When a stock accelerates sharply upward, emotions peak and structure weakens. Sell into the strength.
Pocket pivot days
If a stock is up more than +10% on the day on a pocket pivot, sell 10% of your position.
Climax tops
True climax moves are emotional, fast, and unsustainable. Sell 70-90% to protect gains.
Remember: Vertical moves don't fade slowly. They reverse fast. Stocks don't ask for permission before dropping. If you don't sell into strength, the market will force the exit — often at much worse prices.
Selling Into Weakness
There are three scenarios where we sell into weakness:
1. Stop loss hit
The predefined stop from entry. This is automatic and non-negotiable.
2. Undercutting the EMA
If price goes below the 10-day EMA, sell 2/3 of the position. If it then goes below the 20-day EMA, sell the remaining 1/3.
3. Market trend model
If the overall market turns bearish, we may exit all positions regardless of individual stock performance.