Volatility sizing
Keep the money at risk constant when the market changes its mood. · 6 min
Decide first
When stops are set in ATR, the stop distance grows and shrinks with volatility. Sizing from that distance keeps the money at risk constant:
Volatility clusters: calm stretches and storms each tend to persist. A trader who keeps the size from a calm week into a storm is quietly risking two or three times the budget. Volatility sizing does the adjustment automatically, and it makes positions in different markets comparable: 100 units of a quiet market and 100 units of a wild one are not the same bet.
The same risk in calm and storm
Simulated data · not real prices| ATR(14) | Stop distance | Units for $250 | Risk with calm-sized units | |
|---|---|---|---|---|
| Calm stretch | 0.30 | 0.60 | 413 | $250 |
| Now | 1.79 | 3.58 | 69 | $1,480 |
Keep the calm-stretch size into the storm and the same 2-ATR stop risks 5.9 times the budget. Sizing by ATR keeps it at $250.
Worked example: the same budget across two regimes
- Budget $250, stop 2 ATR.
- Calm: ATR 1.25, stop 2.50 away: 250 ÷ 2.50 = 100 units.
- Storm: ATR 2.50, stop 5.00 away: 250 ÷ 5.00 = 50 units.
- Keeping 100 units in the storm would risk 100 × 5.00 = $500, twice the budget.
Common mistake: the same share count in every market
"I always trade 100 shares" hides wildly different risks. Size is a consequence of the budget and the stop, so it should change every time the stop does.
Check yourself
- You held 120 units sized for ATR 1.00. ATR rises to 2. To keep the same risk with the same ATR stop, how many units now?
- You trade 100 units of two markets with a 2 ATR stop. Market A has ATR 0.37, market B ATR 5.29. How do their dollar risks compare?
- Risk budget $250, ATR 0.39, stop at 3 ATR. How many units?
Closing round
Trade the volatility-clusters market with a 2 ATR stop and the 1% risk sizing. Compare your sizes in the calm and the stormy stretches.
Play the round in the simulator →The simulator's markets are generated, not real prices; the round practises the arithmetic, it does not predict anything.
Further reading: Carver, Systematic Trading. The lesson teaches the idea in its own words and exercises.