Adapting position size to volatility

By Michael R. Bryant, Ph.D.
Higher volatility means greater risk, and it can wreak havoc on trading strategies that don’t adapt. As the markets became more volatile in recent months, many traders increased both their stops and profit targets. But such adjustments are meaningless without addressing position size.

Reducing position size during higher-volatility periods can help mitigate this increased risk. One way to automatically adjust position size to market volatility is to combine two risk-control methods: fixed-fractional position sizing and volatility-based stops.



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