Q: I have read and re-read (as you suggest) your book “Trade your way to financial freedom”. It think it is great material, it is such a mind-opener.
However, I would like to clarify one point that it is yet not clear enough to me. It is about the Percent Volatility Method. If I use such Position Sizing Technique, then the Stop Loss is set by this position sizing method, I mean, the strategy must have a Stop Loss that is equal, for instance, to the 20-day SMA of ATR. If that is the stop loss, then the model is the same as the % of my equity.
I am getting confused. Let;s say that, prior to Position Sizing, my strategy has a Stop Loss that is 20-day SMA of ATR. Thus, the % of my equity and % volatility method are just the same. And if my strategy has no stop loss (let´ts say), if I use the Percent Volatility Method, it will be the method that will calculate the Stop Loss and place it 1ATR below the entry price.
A: Position sizing and the initial stop are two entirely different issues. The stop is NEVER set by the position sizing.
However, if the stop is 1 ATR, then percent risk and percent volatility are the same.
