Position Sizing like Adam Grimes: A Volatility-Based Approach

Position Sizing with Adam Grimes

Position sizing is one of the most important, yet often overlooked, aspects of trading. Adam Grimes advocates for a volatility-based approach to position sizing, which allows you to adjust your position size based on the current market conditions.

The Problem with Fixed Position Sizing

Many traders use a fixed position size, such as 100 shares or 1 contract. The problem with this approach is that it doesn't take into account the volatility of the market. In a volatile market, a fixed position size can lead to excessive risk. In a quiet market, it can lead to missed opportunities.

Volatility-Based Position Sizing

With a volatility-based approach, you adjust your position size based on the volatility of the instrument you are trading. A common way to do this is to use the Average True Range (ATR) indicator. The ATR measures the average range of an asset over a given period of time.

The Formula

The formula for calculating your position size is as follows:

Position Size = (Account Size * Risk Percentage) / (Stop Loss in Dollars)*

Real-World Example: TSLA

Let's say you have a $100,000 account and you want to risk 1% on a trade in TSLA. The current price of TSLA is $250, and you want to place your stop at $240. The stop loss in dollars is $10. Your position size would be:

Position Size = ($100,000 * 0.01) / $10 = 100 shares*

Position Sizing Rules

• Use a volatility-based position sizing model.
• Risk a small percentage of your account on each trade.
• Adjust your position size based on the volatility of the market.