Position Sizing for Commodities: ATR Sizing and Volatility Parity

Position sizing decides how many contracts, ounces or barrels to trade so that every position risks a similar, small slice of your account, whatever the market. The standard method divides the money you are willing to lose, for example 1% of equity, by the money lost per unit if your ATR-based stop is hit. Applied across a portfolio, this becomes volatility parity: each commodity contributes roughly equal risk, so natural gas gets far less exposure than gold.

The fixed-fractional formula

Units = (Equity x Risk %) / (Stop distance x Point value)

• Equity: your current account value.
• Risk %: the share of equity you accept losing if the stop is hit. Many systematic traders use between 0.25% and 1% per trade; the risk of ruin lesson shows why larger numbers are dangerous.
• Stop distance: how far the stop is from entry in price units, often a multiple of ATR (see the charts lesson).
• Point value: the money value of a 1-unit price move for one contract or unit (for example $100 per $1 for a full gold contract, $10 for micro gold, $1 per ounce for a CFD quoted per ounce).

Worked example: four markets, futures

Account $250,000, risk 0.5% per trade = $1,250. Stop = 2 x ATR. Prices and ATRs are round, illustrative numbers.

Market	Price	ATR	Point value per contract	Risk per contract (2 ATR)	Contracts = 1,250 / risk
Gold GC	$4,000	$60	$100 per $1	$12,000	0.10, so 0
Micro Gold MGC	$4,000	$60	$10 per $1	$1,200	1.04, so 1
WTI CL	$80	$2.00	$1,000 per $1	$4,000	0.31, so 0
Micro WTI MCL	$80	$2.00	$100 per $1	$400	3.1, so 3 ($1,200 risk)
Natural gas NG	$3.00	$0.15	$10,000 per $1	$3,000	0.42, so 0
Corn ZC	500 cents	9 cents	$50 per cent	$900	1.39, so 1 ($900 risk)

Two honest lessons come out of this table. First, even a $250,000 account cannot trade a full gold contract at 0.5% risk with a 2-ATR stop; micro contracts make the plan possible. Second, rounding matters: corn rounds down to one contract, risking $900 instead of $1,250, and natural gas does not fit at all unless a smaller contract or a CFD is used.

Worked example: a small CFD account

Account $10,000, risk 1% = $100, same stops (2 x ATR). CFDs can be traded in small units, so sizing is much finer.

Market	Stop distance	Units = 100 / stop	Position value
Gold	$120 per oz	0.83 oz	about $3,333
WTI crude	$4.00 per barrel	25 barrels	$2,000
Natural gas	$0.30 per MMBtu	333 MMBtu	about $1,000
Corn	$0.18 per bushel	555 bushels	about $2,778

Every position risks the same $100, yet the money invested ranges from about $1,000 in natural gas to about $3,333 in gold. That is exactly what we want: the volatile market gets the small position. Check your broker's minimum sizes; if gold can only be traded in 1-ounce steps, 1 ounce would risk $120, slightly above plan, and you must decide whether that is acceptable.

Rounding rules

• Always round down. Rounding up quietly increases risk.
• Set a tolerance. A common rule of thumb: if the minimum size would risk more than about 1.5 times your target, skip the trade.
• Never shrink the stop to make the size fit. A stop moved inside normal noise turns a sensible trade into a likely loser.

Volatility parity

Instead of sizing from a stop, you can size so that each position has the same expected daily movement in money. This is called volatility parity or equal-risk weighting.

Units = (Equity x Target daily risk %) / (ATR x Point value)

The Turtle traders used this idea: one "unit" was sized so that a 1-ATR move equalled 1% of equity (see the trend-following lesson).

In portfolio terms, volatility parity means notional weights are inversely proportional to volatility.

Volatility parity ignores correlation: two highly correlated markets still add up to one bigger bet. The diversification lesson deals with that.

Portfolio heat: total open risk

Portfolio heat is the sum of the money at risk to the stops of all open positions, as a percentage of equity.

Re-sizing as equity changes

Calculate each new trade from current equity. After a 10% drawdown, a 1% risk is 10% smaller in money, which slows losses. After gains, positions grow. This automatic adjustment is a key reason fixed-fractional sizing survives losing streaks better than fixed lot sizes.

A leverage check after sizing

Add up the value of all positions and divide by equity. In the CFD example, total value is about 3,333 + 2,000 + 1,000 + 2,778 = $9,111 on a $10,000 account: effective leverage of about 0.9:1. Disciplined risk sizing usually produces modest leverage, even when the broker offers much more.

Mistakes to avoid

• Sizing by available margin: "I can afford five lots" says nothing about risk.
• The same lot size everywhere: one lot of natural gas and one lot of gold are completely different risks.
• Ignoring gaps: in markets that gap often, such as natural gas, or that can lock limit, such as grains, consider a lower risk % than in gold.
• Forgetting to recalculate ATR: volatility changes, and yesterday's size may be wrong today.