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Volatility-Targeted Trendthe same trade, sized by how loud the market is

Evidence: StrongProfessionalVolatility · Scaling

This is the one strategy in the book where the entry is deliberately dull. A moving-average trend rule, nothing clever. What makes it work is that the position size is set so every trade risks the same amount of volatility, not the same number of lots.

Moreira and Muir showed that scaling exposure down when realised volatility is high and up when it is low improves risk-adjusted returns across equities, currencies and commodities — and they were explicit that this works because volatility is predictable while the equity premium is not.

The edge here is in the sizing, not the signal. That is unusual enough to be worth saying twice.

Category
Volatility · Scaling
Timeframe
D1 signal · positions held days to weeks
Suitable pairs
Any liquid pair or index — the more instruments the better
Session
Daily close only. No intraday decisions.
Indicators / tools
EMA(20) and EMA(50) · ATR(20) · a target volatility per trade

Valid setup

VL-04 · VOLATILITY-TARGETED TREND — VALID SETUP GBPUSD · D1 · the signal is the EMA cross; the ATR sets how big the position is allowed to be LONG 1.2412 1.2528 1.2644 1.2760 1.2875 1.2991 1.3107 2R — but there is no fixed target 1R = 3 × ATR(20) EMA(20) EMA(50) ENTRY = daily close, EMA(20) above EMA(50) STOP = 3 × ATR(20) 1 2 3 1.2860 1.2770 ATR(20) — when this rises the position must shrink ① EMA(20) crosses above EMA(50) — direction set ② Read ATR(20): this decides the LOT SIZE, not the entry ③ Same volatility risked as in any other regime ④ Stop 3 × ATR away — wide on purpose ⑤ No target. Out on the opposite cross ⑥ Re-size weekly as the ATR changes

Exact rules

Entry

  • Direction: long while the EMA(20) is above the EMA(50), short while below. That is the whole signal.
  • Enter at the daily close on the first bar the condition is true.
  • Size = (account × target risk) ÷ (ATR(20) × contract value). When the ATR doubles, the position halves. This is the strategy.
  • Recompute the size weekly, not only at entry — a position that was correctly sized a month ago is not correctly sized now.

Stop loss

  • 3 × ATR(20) from entry. Wide, because the sizing has already made the position small enough for that to be survivable.
  • The stop distance moves with the ATR, so it is the same risk in every regime by construction.
  • Risk 0.5% per position and cap total portfolio risk — the sizing rule makes it very easy to end up with twenty small positions that are all the same trade.

Take profit / exit

  • No fixed target. Exit when the EMA(20) crosses back under the EMA(50).
  • Trail at 3 × ATR(20) behind the extreme once the position is 2R up.
  • This is a low-hit-rate strategy that pays for itself in the tail. Taking profits early is the single most reliable way to break it.

Build Volatility-Targeted Trend

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More from Volatility

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Trading carries risk and most retail accounts lose money. Nothing on this page is financial advice or a recommendation to trade. The chart is an illustration of the rules on constructed candles — it is not a record of a trade and not a backtest.