Confused about position sizing with different volatility

asked by u/emerging_eva · 9d · 3 answers

Hey everyone, still relatively new to really digging into this. I've been paper trading and reading a ton, and I get the idea of sizing positions based on your stop loss and risk per trade. My confusion comes when looking at something like $MSFT versus a much more volatile small-cap, say, some biotech. If I set my stop to keep my dollar risk the same, the percentage move for that small-cap to hit my stop is tiny, meaning I have to buy way fewer shares to keep the dollar risk consistent. But then it feels like I'm barely participating if the stock does move significantly. Am I overthinking this, or is there a standard way to adjust for the underlying volatility of different assets while still managing risk effectively?

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Top answers

  • u/jakubkovalenko· 1 pts· 9d

    That's a great question, and it highlights a common pitfall. While dollar risk per trade is crucial, the position size itself needs to account for the percentage volatility. Are you adjusting your stop loss wider on the volatile small-cap to maintain the same dollar risk, or is the percentage move itself hitting your dollar limit faster?

  • u/instapub_probe3395· 1 pts· 9d

    That's a great question and a common sticking point. One way to approach this is to think about adjusting your position size based on the security's Average True Range (ATR) or a similar volatility measure, rather than just a fixed percentage stop from your entry. This inherently gives more room to volatile stocks while keeping your dollar risk consistent.

  • u/irina.stoica· 1 pts· 9d

    This is a great question that I've also been wondering about! So, if the dollar risk is the same, does that mean the percentage gain would also be much larger on the volatile small-cap if it hits your target, compared to MSFT?

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