Position Sizing Calculator

What is Value at Risk (VAR)?
VAR is a risk management method where you can compute the maximum number of shares you can buy in relation to how much capital you can tolerate to lose on a single trade, this is called the Portfolio Risk.

Example:

Portfolio Value – Php 100k
Portfolio risk – 1%
VAR (100k * 1%) = Php 10,000 , which is also the maximum loss you will allow per trade regardless of price or share quantity.

The 1% risk is not your cut loss % per trade, it is the % loss of the whole portfolio from a single trade.

What is the Average True Range (ATR)?
The ATR is the whole price range of a stock in a particular day/period, averaged out. It is a very useful indicator of a stock’s volatility, the higher the number, the more volatile the stock is.

The Inputs

Stock code – The calculator will get the latest value once you type it in
Portfolio Value – Your portfolio value, needed for computing the position size
Portfolio Risk in % – The maximum allowable loss to your portfolio per trade.
Entry Price – Your buying price
Stop Price – Your stop loss or cut loss price
ATR Period – the number of periods you want to average out. Usual setting is 14.
ATR Value – This is automatically computed but you can input the ATR value manually if you wish.
ATR Multiple – The method works by using a multiple of ATR, usually at 2-4. Short term traders should use smaller multiples and vice versa.
Size in Shares – The maximum number of shares you should buy.
Size in Amount – The size in shares in Peso amount.
Target Portfolio Volatility: Set a target volatility for the whole portfolio
Score: Acts as a multiplier, from -20 to +20 only. It is a scale of bullishness for a particular trade, -20 is super bearish while +20 is super bullish.

The computed size is the maximum allowable position size based on your parameters. You are free to split this up into multiple entries.

The Strengths and Weakness of Each Method
The VAR method is very useful for traders who has a pre-determined cut loss price set. This way, when a trade goes bad, the portfolio will not suffer losses more than what you have accounted for. This is a great method to prevent doing overly big trades. However, a major weakness of VAR is that it doesn’t account for a stock’s volatility.

The VAR-ATR method uses ATR as a measure of volatility and will automatically adjust your position size and determine your stop loss price relative to the VAR and stock’s volatility. What’s neat is that when trading volatile stocks, the method will tell you to trade a smaller size and also provide a wider stop, allowing you more leeway for volatile price action. The downside is that during times of low volatility, the VAR ATR might let you trade a bigger than usual amount, which can be a double edged sword.

The Volatility Targeting method doesn’t use value at risk but instead uses a stock’s annual standard deviation as a measure of volatility and tries to match it to your target portfolio volatility, meaning a conservative trader will have smaller exposures as compared to a swing trader even if they are trading with the same stock and entry price.

Aside from the method automatically adjusting the sizing based on your Target Portfolio Volatility, it will also apply a multiplier based on the Score, depending on how bullish or bearish you are on that particular trade. However, the scoring system is also a potential weakness since it’s left to the trader on how to quantify the quality of the trade; overestimate a trade’s score and you may end up exposing too much on a bad trade.

VAR position sizing formula
size = (portfolio size * % risk) / (entry – stop)

VAR-ATR position sizing formula
size = (portfolio size * % rsik) / (ATR * multiple)

Volatility Targeting Formula
size = (1/Max # of stock holding) * Portfolio size * (Target Portfolio Volatility / Annual Stock St. Dev.) * (Score/10)