how to balance different stock price volatility using position sizing? if u are buying 2 stock A is $1.10 and the other B is $29.30 the dollar movement of the A if definitely smaller than B but in % A has bigger % change than B. How to determine how much to allocate to each stock so that the equity swing of each stock more or less balance?
Keep it simple. Allocate the same amount of money to each stock, say $5,000 for a $100,000 account. If A goes up 10%, you make 10% on your five grand and the same for B. If the stock goes to zero, you lose 5% of your account. If you want to complicate it, you can adjust for volatility. Allocate $5,000 to each stock and then divide by some variant of the ATR so that position size is reduced as volatility increases.
Often the % move of A is 10 to 20% while B is 2 to 3% Allocating $5k to each stock or dividing atr would not balance the equity swing of A and B
you adjust it according to the volatility... and you set your max risk in dollars for each trade to be the same total risk capital = $10,000 max risk per trade = 3% of capital $1 stock with 20% volatility ( .03 * total capital) / .2 = $1500 in the position = 1500 shares $50 stock with 10% volatility ( .03 * total capital) / .1 = $3000 in the position = 60 shares your dollar for dollar risk is the same given the volatility.. obviously when markets go down, things start to become highly correlated, and the volatility starts to match up so you would need better risk control than this at some point - portfolio level max risk, or using uncorrelated asset classes, strategies, etc.
How to measure stk volatility consistently? Tried using atr or absolute roc but they are all historical and varies alot. A might be 20% and B 10% and forwardly A might be just 3% and B 20%. The volatility does not seems consistent
Thats why people (fund managers) use Northfield or Barra among other commercially available equity risk models... http://www.northinfo.com/documents/5.pdf http://www.mscibarra.com/products/analytics/models/global_equity_model/
These calculations assume that the stop-loss for each position will be equal to the volatility. Other wise, the risk percent will not be 3%. These is no basis for such assumption. The stop is most of the times determined by some algorithm and in some cases it is not even known when the trade is placed. This is why I will keep saying that most people have never traded seriously or they do not know they are making serious errors in their position sizing by following stupid advice.
Why should anyone who knows the answer to this - otherwise good - question go ahead and give it? It is of course the key question, there is an answer to it but, hey, that answer is part of the edge of most people.