Volatility targeting: less stock when the market shakes
Hold fewer shares when the market is jumpy and more when it is calm, to keep the swings of the account roughly constant.
The rule
Pick a level of swings you can live with. When the market swings more than that, cut the position in proportion; when it calms down, raise it again.
Why people use it
Big falls usually come with high volatility, and volatility clusters: a nervous week tends to follow a nervous week. Cutting the position in such periods softens the worst drops.
Where it hurts
After a sharp fall the position is small, so part of the rebound is missed. In a choppy market the rule keeps trading back and forth and pays commissions.
How our bot runs it
The bot holds SPY and aims at 12% volatility a year. Once a week it measures the last 20 days and sets the share of SPY in steps of 10%, never above 100%. The rest sits in BIL (short Treasury bills).
Live account
A virtual $100,000 account that follows this rule. Every trade is on the bot's page.
| Bot | Account | Return |
|---|---|---|
| S&P 500 at steady risk | $99,863 | −0.14% |