Volatility-based sizing: what's your formula?
Risking the same money per trade ignores that some days move twice as much as others. Volatility-based sizing scales positions down when ATR is high and up when it's low, keeping risk roughly constant in market terms.
What's your method?
- the ATR period and the risk target
- how position size changes across your pairs
- whether it changed your drawdowns
The ATR guide has the full formula with examples.
Background: Average true range (ATR): measuring volatility and setting stops
ATR shows how far a pair typically moves in a period. Here is how true range is calculated, and how traders use ATR to place stops and size positions.
How is ATR calculated?
True range for each period is the largest of high minus low, high minus the previous close, and low minus the previous close, ignoring signs. ATR averages true range, typically over 14 periods with Wilder's smoothing.
What ATR multiple should I use for a stop-loss?
Many traders use 1.5 to 2 times ATR, but there is no correct number. Wider stops are hit less often and need a smaller position to keep the same amount of money at risk.
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