- The 3-day exit rule
- Four inputs: ADV, float, vol, event risk
- A simple sizing formula (with examples)
- When to override (and when not to)
- Desk checklist
The 3-day exit rule
Size every position so you can unwind it in ≤ 3 trading days without exceeding a conservative fraction of market liquidity. This caps P&L tail risk during gaps, downgrades, or macro shocks.
Four inputs
1) ADV (Value)
Use 20-day median traded value (₹). Drop the top/bottom outliers. Multiply by 3 for the exit window.
2) Free float
Lower float means more impact per ₹. Haircut ADV by a float factor: Haircut ≈ (Free-float % / 100) ^ 0.7.
3) Volatility
Higher ATR/σ = wider expected range = more slippage. Apply a vol surcharge: reduce capacity by 10–30% for high-vol names.
4) Event risk
Results, block deals, index changes. Halve capacity in the 3–5 sessions around binary events.
A simple sizing formula
Let ADV20 be 20-day median value traded, FF free-float %, V volatility factor (1 = normal; 0.8 = high vol cut), and ER event factor (1 = none; 0.5 = binary risk).
Max Position (₹) ≈ ADV20 × 3 × TargetParticipation × (FF/100)^0.7 × V × ER
TargetParticipation Large/mid: 0.18 (18%). Small: 0.10 (10%). Illiquid micro: 0.06 (6%).
Illustrative examples
| Bucket | ADV20 (₹ cr) | FF % | V | ER | Target% | Max Position (₹ cr) |
|---|---|---|---|---|---|---|
| Large-cap bank | 1,200 | 88 | 1.0 | 1.0 | 18% | 570 |
| Mid-cap capital goods | 250 | 55 | 0.9 | 1.0 | 18% | 155 |
| Small-cap specialty chem | 45 | 40 | 0.8 | 1.0 | 10% | 23 |
| Microcap consumer (event week) | 12 | 32 | 0.8 | 0.5 | 6% | 3 |
Numbers are illustrative; plug your own ADV, float and risk factors before use.
When to override (and when not to)
- OK to override up if you have firm liquidity support (block window, reverse-inquiry, index inclusion flows).
- Never override on hope: illiquid smallcaps ahead of results, or into known supply (warrant/ESOP unlocks) without buyers mapped.
- Dynamic cuts: If stock drops > 8% vs cost without news, shrink to restore exit capacity.
Desk checklist
Before entry
- Compute ADV20 (value), float factor, vol factor, event factor.
- Confirm 3-day exit capacity ≥ planned size.
- Tag catalysts and blackout windows.
While in trade
- Recalc weekly; reduce size if ADV dries up or vol spikes.
- Escalate trims on breadth deterioration (A/D line flips).
- Log realized slippage vs model—tighten targets if offside.