Volatility-Based Position Sizing
Volatility-based sizing reduces units when the chosen movement estimate rises and increases units when it falls. It aims to control a specified exposure measure rather than guarantee a fixed realized loss.
How it works
For a simple stop-distance model, units=floor(planned cash risk/(stop distance×value per price unit)). A multiple of ATR can define the distance. For derivatives, use the contract multiplier, currency conversion and margin terms. Planned risk is distinct from account leverage and worst-case loss.
Worked example
An account of 20,000 sets a hypothetical planned loss budget of 100. With ATR 2 and a two-ATR stop distance, per-share distance is 4; ignoring costs, floor(100/4)=25 shares. If ATR doubles to 4, the same rule allows floor(100/8)=12 shares. Commissions or a slippage allowance can reduce these quantities further.
Amounts, prices and scenarios are fictional teaching examples. They exclude any effects not explicitly stated and are not trade recommendations.
Limits and common mistakes
Recent low volatility can encourage excessive size before a shock. Stops can gap and correlations can rise across positions. Position limits, portfolio concentration and liquidity should constrain the volatility calculation.
Knowledge check
Does risking 100 through a stop guarantee a maximum loss of 100?
Read the explanation
No. The arithmetic assumes an execution distance. Gaps, slippage, fees and currency movements can make realized losses larger.
References and further reading
These sources explain the underlying concepts and specifications. They do not endorse QBMFX Academy. Check the relevant market, protocol version and reporting rules before applying an example.