Volatility targeting keeps per-trade risk consistent when the market accelerates or compresses. On the Gold path it is the technical lever that makes position sizing dynamic.
Who this is for
- Anyone using quantitative size rules.
- Anyone trading instruments with highly variable volatility.
- Anyone who wants to reduce sudden shocks to equity.
Prerequisites — Complete Silver path first (min.: Max daily risk, Max drawdown, Robustness, Backtest). Foundation: Bronze path.
In plain terms — When volatility rises, reduce exposure. When it returns to normal, you can increase it gradually.
Operational logic
Define an annualised or daily vol target for the portfolio. Calculate realised volatility on a window consistent with your horizon. Scale size with an adjustment coefficient, avoiding abrupt changes. Use minimum and maximum limits to avoid swinging from overexposure to underexposure. Review the formula when market regime changes.
Example — Risk target of 10% annual and realised volatility rising from 12% to 18%. Size is reduced by roughly one third to keep risk constant. If vol returns to 11–12%, size is restored in two or three steps.
Card
- Goal: stabilise risk over time.
- Key inputs: realised volatility, vol target, size limits.
- Warning sign: too-frequent exposure changes.
- Typical mistake: using a vol window inconsistent with the system.
- Practical action: smoothing rules and operational caps.
Gold path — Module: Advanced risk control. Part of Gold path.