![]() ![]() ![]() ![]() We are trading forex and this formula applies to the futures markets. Thus, our position- sizing model, based on volatility, would allow us to purchase 3 contracts. If we divide our 300 per contract fluctuation into our allowable limit of 1,000, we get 3.3 contracts. Lets say that we are going to allow volatility to be a maximum of 2 percent of our equity. How many gold contracts can we buy Since the daily range is 3 and a point is worth 100 (i.e., the contract is for 100 ounces), that gives the daily volatility a value of 300 per gold contract. We will use a IO-day simple moving average of the average true range as our measure of volatility. Suppose that you have 50,000 in your account and you want to buy gold. Heres how a percent volatility calculation mightwork for position sizing. ![]() This is basically Wells Wilders average true range calculation as shown in the definitionsat the end of the book. If IBM varies between 141 and 143 then its volatility is 2.5 points, However, using an average true range takes into account any gap openings. Volatility, in most cases, simply is the difference between the high and the low of the day. If you equate the volatility of each position that you take, by making it a fixed percentage of your equity, then you are basically equalizing the possible market fluctuations of each portfolio element to which you are exposing yourself in the immediate future. Its a direct measurement of the price change that you are likely to be exposed to-for or against you-in any given position. MODEL 4: THE PERCENT VOLATILITY MODEL Volatility refers to the amount of daily price movement of the underlying instrument over an arbitrary period of time. ![]()
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