Percent volatility sizing

Instead of asking "where is my stop", percent volatility sizing asks "how much does this thing move on an average day, and how much of my account should that move represent".

Size = (equity x target percent) / (daily volatility in currency per unit). On a $100,000 account targeting 0.5% daily noise, that is $500. A stock with a $1.20 average true range gets 416 shares; a stock with a $0.15 range gets 3,333 shares. Both positions now wobble by roughly the same dollar amount on a normal day, which makes a basket of positions comparable.

It is the foundation of volatility-targeting and of most managed futures programmes. The weakness is that volatility estimates are backward-looking: they are lowest just before regimes break, so the method sizes up into calm markets and gets caught by the transition.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.

Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.