investing
Risking a fixed percentage per trade is the standard advice and it works well inside one market. Across forex and crypto it quietly breaks, because the same percentage buys a very different amount of variance.
The problem in one table
| Instrument | Typical daily range | Stop that survives noise | Effect on size |
|---|---|---|---|
| EUR/USD | under 1 per cent | tens of pips | Large nominal position |
| Major crypto | 3 to 5 per cent | several per cent | Much smaller position for the same risk |
| Small-cap token | 10 per cent or more | very wide or none | Tiny position, or none |
Volatility scaling in three steps
- 01Measure average true range over 20 periods on the timeframe you trade.
- 02Set the stop as a multiple of ATR rather than as a fixed number of pips or per cent.
- 03Derive size from the currency risk divided by that stop distance. Size now adapts automatically.
The result is that a calm EUR/USD position and a volatile crypto position contribute a similar amount of variance to the portfolio, which is what a fixed risk percentage was supposed to achieve in the first place.
Correlation still has to be handled separately
Volatility scaling equalises single positions. It does nothing about six positions that are the same bet. In practice most crypto holdings are one trade, and a book of dollar-denominated FX positions is often another. Net exposure per currency and per theme, cap each, and recheck before every new entry rather than at the end of the day.
A fixed per cent of equity is a constant number and a variable amount of risk. Only one of those is useful.
Written by Aram Latifi. Ex-quant developer, now writing about the plumbing of retail trading. No affiliate links on this site.
