Smooth Out Your Equity Curve By Cutting Vol

You are capable of controlling your whipsaws to some degree by monitoring you position size and adjusting it accordingly. This is true whether you run a computerized system or are a discretionary trader.

As volatility increases for the contracts you are long or short, you’re likely to see your equity get whipped around more. That can be trying on your nerves. If you don’t have a friendly, neighborhood Trading Tribe ™ to go visit in order to uncover what those nervous feelings are trying to teach you and where you may be feeling them in your body, you can read a little about them here.


If you are a systems trader, you are likely to be long several commodities listed in the chart. The “% Change ATR” column represents what has happened to the 20-Day ATR since February 1 through the 28th. If you are fully-loaded with cotton or crude oil, for example, you may find that your account equity is getting whipped especially due to either of these contracts. What to do?

Cut the position down to better keep a lid on your daily change in equity. You can do this by hand or you can program it to take effect once the ATR has increased by a specific percentage.

Did you say daily equity ? Yes, if you are going to approach an allocator, they will almost certainly ask to see your daily equity run. If it’s more that 0.50% you are considered very aggressive. It’s not bad, but it’s not likely to help you get an allocation. When I speak about his in the Mentoring Program, eyes start popping out of people’s heads. Allocators don’t need you to drive volatility: they can get that on their own without you and your fees. Low vol is an asset to an allocator as much as your alpha and small drawdowns.

If you are a discretionary trader, you are likely trading around core positions or swing trading. Seeing gigantic swings in your equity might be what trading is all about for you. Just keep in mind that if you see a one or a two-range day in the direction of your liking, you can absolutely see a two to four-range day against you. I have had them happen to me. Use your protective stops all you want, but when you wake up and the contract is off 2 big numbers, there’s not much you can do. Your first loss is your best loss at that point.

Regardless of your approach to risk management (what everyone else calls trading), the result and the shape of your equity curve that you garner can be controlled to some degree if you learn to “prune your hedges” and keep a position size on that if it goes against you, can’t kill you.


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Please note: I reserve the right to delete comments that are offensive or off-topic.

  • Manuelbravochico

    I agree for new traders on cutting size when ATR gets too big. But if you really want to go to next level, you start breaking out downside volatility versus upside volatility. To get to next level, you have to be fully loaded at some point during the trade. Sure as the trend matures/accerlerates you cut size. But there’s no doubt that at some point you have to be fully loaded when ATR starts blowing up in your favor. I think some people call it “pressing it”.

    You learn this, and you’re chances of being very successful versus just good go up considerably.

  • Anonymous

    Maybe if you’re a prop trader or trading for yourself, then I’d agree. But
    if you’re a CTA or developing your track record, your daily and monthly vol
    is being watched by the allocators and even a big vol up month can be looked
    at negatively. I think trying capture upside or downside vol is a different
    discussion entirely.

  • Kshitijkgupta

    Both these comments are absolutely correct.

    Martin….any chance of an article highlighting how to approach Manuelbravochico’s comment….going for the jugular. Your comments on how to manage risk in such a scenario will help followers !

  • Manuelbravochico

    Imho, these 2 topics take you down same road.

    It’s case specific and most are going to ask/call you when you have downside, not upside.

    The best investors are always tracking daily leverage/margin requirements anyway. If you get a golden week and up 4X average up month on same average margin requirements, then most not going to call anyway. If they do it’s more likely to be asking how you did it while sucking up the same amount of their margin reserve. A luxury call.

    However, if you suck up 4x more margin then of course they going to call you. Post 2008, margin departments at FCM,Brokers are increasingly located in the corner offices unlike pre 2008. When they call me, I always pick up fone as they can shut you down at their discretion.