Question on position sizing for less correlated assets

Question

Hey all. I've been trying to get a better handle on my position sizing lately, moving beyond just a fixed percentage of account value per trade. I'm experimenting with a method that incorporates a rough volatility estimate based on recent ATR, then adjusting size so that a move to my initial stop loss represents a consistent percentage risk. That seems to work okay for single, highly liquid assets like $EURUSD or major indices.

However, I'm finding it trickier when I'm looking at, say, a basket of three or four different commodities that might have some degree of correlation, but aren't perfectly linked. If I size each one individually to a 1% risk based on its own ATR and stop, am I effectively overexposing myself when they move in tandem? Or am I overthinking this and the individual sizing is sufficient because the correlation isn't 1:1? How do you guys factor in potential correlation when sizing multiple positions opened around the same time?

astoica · Accepted Answer

Your ATR approach for consistent percentage risk at the stop is sound, assuming your stops are well-defined. But for less correlated assets, do you also factor in how their correlation might change under stress, or are you just treating each as an isolated risk?

johnson_marcus · Answer

That's a solid approach for consistent risk. Have you considered how using a fixed percentage of account value for stop loss risk interacts with your total portfolio allocation across different asset classes, especially with less correlated ones?

liam86 · Answer

Your ATR approach for sizing is standard. Where does the 'less correlated assets' part come in? Are you talking about portfolio-level risk management or just individual sizing for each asset in a portfolio that happens to be less correlated?

devries_pablo · Answer

Your ATR approach for sizing makes sense, but applying it blindly to less correlated assets might not give you the diversification you're expecting if the volatility estimates are off or the correlation suddenly shifts. Have you backtested how your total portfolio volatility behaves when those less correlated assets experience their own unique, large moves?

Question on position sizing for less correlated assets

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