I appreciate the clear explanation of volatility-adjusted sizing. That said, isn’t it true that the dramatic swings in trade risk highlighted here would mainly occur for strategies where stops or targets are tied to volatility measures like ATR? For strategies using fixed or percentage-based stops/targets, the actual risk per trade might not fluctuate nearly as much. Would love to hear your perspective on that.
Great question and you’re right about one thing: the most obvious and dramatic risk swings show up when both position size and stops are volatility-based.
However, static position sizing still creates large, hidden risk even when stops or targets are fixed or percentage-based. The mechanism is just less visible.
If you trade a fixed position size (1 contract) with a fixed stop (say 1% or a fixed number of points), the nominal stop distance is constant but the market’s volatility regime is not.
In low-volatility regimes: That fixed stop is wide relative to normal price movement. Trades last longer, drawdowns feel small and you’re unintentionally under-risking.
In high-volatility regimes: The same fixed stop is tight relative to recent movement. Stops are hit more frequently and more violently and you’re unintentionally over-risking, even though position size and stop are “unchanged”
So while the stop distance doesn’t change, the probability distribution of outcomes does and that’s what actually defines risk.
Volatility-adjusted sizing doesn’t just align stops with volatility it aligns exposure with volatility. That alignment matters regardless of how the stop itself is defined. Sorry for the insanely long answer but it’s a good question that needs a good answer:)
Really good article, been writing about vol-adjusted position sizing myself. A simple Volatility-Regime-Filter changes so much, especially for strategies that get in and out during the day.
Great article, the step by step explanation is very easy to understand for readers. Would you add any other parameters than ATR for black swan events, to capture the volatility and to adjust the position sizing ?
Good input, ty 🥂
I appreciate the clear explanation of volatility-adjusted sizing. That said, isn’t it true that the dramatic swings in trade risk highlighted here would mainly occur for strategies where stops or targets are tied to volatility measures like ATR? For strategies using fixed or percentage-based stops/targets, the actual risk per trade might not fluctuate nearly as much. Would love to hear your perspective on that.
Great question and you’re right about one thing: the most obvious and dramatic risk swings show up when both position size and stops are volatility-based.
However, static position sizing still creates large, hidden risk even when stops or targets are fixed or percentage-based. The mechanism is just less visible.
If you trade a fixed position size (1 contract) with a fixed stop (say 1% or a fixed number of points), the nominal stop distance is constant but the market’s volatility regime is not.
In low-volatility regimes: That fixed stop is wide relative to normal price movement. Trades last longer, drawdowns feel small and you’re unintentionally under-risking.
In high-volatility regimes: The same fixed stop is tight relative to recent movement. Stops are hit more frequently and more violently and you’re unintentionally over-risking, even though position size and stop are “unchanged”
So while the stop distance doesn’t change, the probability distribution of outcomes does and that’s what actually defines risk.
Volatility-adjusted sizing doesn’t just align stops with volatility it aligns exposure with volatility. That alignment matters regardless of how the stop itself is defined. Sorry for the insanely long answer but it’s a good question that needs a good answer:)
Great article. Very clear and helpful.
Thank you
BTW, 45/10k = 0.45%; 8/10k = 0.08%.....
Really good article, been writing about vol-adjusted position sizing myself. A simple Volatility-Regime-Filter changes so much, especially for strategies that get in and out during the day.
Great article, the step by step explanation is very easy to understand for readers. Would you add any other parameters than ATR for black swan events, to capture the volatility and to adjust the position sizing ?
Thank you! I usually prefer to keep it as simple as possible with only the ATR as a parameter.