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Market Intelligence › Basic Terminologies
The logic of changing size according to market volatility
Published by The Retail Trader · JUL 25, 2026 · Risk Management
Most people think of position size as a fixed rupee amount or a fixed quantity. The result is that risk is low in a calm market and very high in a volatile one — without any decision having been made.
The logic of volatility targeting is the reverse — first decide how much daily movement is acceptable to you, and then work out the position size from that.
When volatility rises, the size automatically becomes smaller, and when it falls, the size becomes bigger. The risk stays steady while the position keeps changing.
The practical implementation is simple:
• Measure the instrument's recent daily volatility, for example with ATR.
• Set your target daily risk in rupees.
• Work out the size by dividing by that volatility.
• Review the size periodically as volatility changes, not every day.
Its biggest benefit shows up during a crash — when volatility rises, this approach cuts exposure automatically. That automatic risk reduction happens at exactly the time when it is hardest to make that decision manually.
This article is educational only — it is not a buy or sell recommendation, makes no claim of guaranteed returns, and is not advisory. Rules, rates and mechanics are changed from time to time by the exchanges, SEBI and RBI, so verify every number yourself with your broker or an official source.