Size Positions to the Environment

Price action doesn’t respond to how confident you feel or how good your strategy performs. It responds to how volatile the market is at the time. Here’s a good rule to use:

High volatility = smaller size.
Low volatility = normal size.

That’s it. No crystal balls, just reality.

Many traders make the classic mistake to size trades based on conviction or historical performance. The problem? The market is unpredictable. It expands when it wants, contracts when it wants, and punishes anyone who ignores the changes in volatility. Position size is the key risk management tool. 

Here’s what works:

When volatility expands with wider ranges, faster candles, larger ATRs, cut size automatically. Sometimes dramatically. That should keep your drawdowns shallow and your emotions calm. When volatility contracts, return to normal size, knowing your stops are tighter and losing outcomes more acceptable

What doesn’t work is trying to trade “through” volatility with the same size. That’s how small losses turn into big losses. Volatility is not just noise, it’s leverage applied against you if you ignore it.

This isn’t just personal experience; it’s supported by research. Volatility targeting has been studied extensively in institutional portfolios. Research shows that adjusting size based on volatility significantly improves risk-adjusted returns across all asset classes. The idea is simple: when risk rises, exposure should fall. When risk falls, exposure can increase without changing the strategy itself!

The same logic shows up in position sizing theory. The Kelly Criterion, while often too aggressive in practice, is fundamentally volatility-aware: higher volatility reduces optimal bet size. Even fractional Kelly approaches used by professional traders are essentially saying the same thing—risk scales with uncertainty.

For retail traders, this doesn’t require complex math. A simple rule works:

• If ATR is above normal → reduce size.
• If volatility spikes due to news or earnings → reduce size.
• If volatility compresses → trade your standard size.

Survival precedes success. Adjust risk to environment, and the market stops feeling like a casino and starts behaving like a business.

To your trading success!

Mike Siewruk

PS: Was this advice helpful? Feel free to pass this link for a FREE membership to Trade Aptitude along to your trading buddies: thedailymarketforecast.com/signup