Fixed-Volatility Money Management

Fixed volatility looks to limit the market’s volatility to a fixed percentage of your account balance. To calculate the number of contracts to trade according to fixed volatility, you would use the following formula:

image

Market volatility (Pips risk in dollar value) refers to market movement measured by using ATR Stop-Reversal Level.

Fixed volatility does not take into account a trader’s individual risk. If the market’s volatility measure is within the fixed-percentage account limit, a trade is taken, regardless of its individual risk. Similarly, if the market’s volatility expands and exceeds the fixed percent account limit, a trade will not be selected, regardless of its individual trade risk.

For example, if you had USD15000.00 account balance and wanted to limit your risk to 2% of your account, you will face 200 pips risk which determined by using 10-day ATR. Pip value for EURUSD is USD1.00 (in mini account).

The following table illustrates how the number of contracts traded changes with the market’s volatility.

Account Balance

Fixed Percent

Fixed % dollars

Market’s 10-day ATR

Contracts Added

Points

Pip Value

$$ Vol

Actual

Round Down

$15000

2%

$300

64

$1

64

2.3

2

$15000

2%

$300

157

$1

157

1.9

1

$15000

2%

$300

269

$1

269

1.1

1

$15000

2%

$300

533

$1

533

0.56

0

 

In short, when market volatility is high, fixed volatility tells you to trade less because market is wild and dangerous. When the market settles down, fixed volatility tells you to trade more because the market is behaving itself. It should be noted that if 10-day ATR is used as stop loss, then fixed percentage and fixed volatility would produce the same position size.

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