Adjusting For A Volatile Market

"Adjusting Position Size For A Volatile Market"

with

Larry Connors

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tradertalk@tradingmarkets.com

Assume S&P cash ($SPX) closes at 1000. If volatility is 20%, there is a 2/3 probability that the range will be between 989 and 1010.

If volatility doubles to 40%, there is now a 2/3 probability of the range being between 979 and 1021.
(i.e. the likely range of the day has doubled)

If you're using a fixed-amount stop, this means you will be likely be stopped out twice as often.
i.e. if you risk .50 on 1000 shares, you will likely see your stop hit twice (2x) as often

How Do You Adjust To Increased/Decreased Volatility?

Use the 100-day moving average of the VIX to give a normal reading. This normal reading will be the base of your position size.

Example: If the 100-day moving average of the VIX is 20%. And hypothetically, today the VIX reading is 40%. This means the likely range will be double.

The VIX has doubled since March

General Guidelines

If you normally trade 1000 shares, you should cut your position size in half.

Normal volatility today as measured by 100-day moving average of the VIX is 25%.

If you typically trade 1000 shares, you should adjust your position size to adjust for the VIX as follows:

VIX     Shares

25%     1000

30%     900

35%     800

40%     700

45%     600

50%     500

At 20% VIX, you might increase to 1200-1300 shares (i.e. March 2002)

Positives of increased volatility:

When you are correct, your gains will normally be double your average.