Volatility-based position sizing
How do traders size a position so that one normal price move costs the same amount, whatever the market's volatility?
In plain words
Volatility-based position sizing sets the size of a trade so that a typical price move loses a fixed, chosen amount. When volatility doubles, the position is halved. The aim is that a market swinging harder does not automatically make the account lose more.
Why it matters
Markets rarely stay at one volatility level. A size that felt modest in a quiet month can be several times too large in a wild week, so a fixed position size or fixed share count ignores a shift that directly changes the risk carried.
In a real week: ETH, week of 24 May 2021
In the week starting 24 May 2021, ETH's realised volatility (measured from hourly prices over the week) was 175.6% a year, its daily return swung between +26.32% and -12.04%, and its largest hourly move was 5.22%. A size calibrated to a calmer regime would leave a single day's 12.04% swing costing far more than intended; sizing against 175.6% volatility shrinks the position so that such a move costs roughly the set amount.
A common mistake
Sizing by volatility does not cap losses or guarantee anything. Volatility is measured from prices that have already passed, so a sudden jump can still exceed the assumed typical move.