A Simplified Tsallis EVaR Indicator for Risk-Scaled Position Sizing

Summary

This indicator estimates a simplified Entropic Value at Risk (EVaR) from recent close-to-close returns. It approximates a moment-generating function with a Tsallis q-exponential, then combines that value with a confidence parameter and q parameter. The resulting EVaR is normalized against its rolling range and displayed as a risk gauge. The script also compares EVaR with return volatility, though it does not use that ratio in its sizing rule.

Position size is set as a maximum allocation multiplied by one minus normalized EVaR, with a floor on the adjustment factor. The indicator converts that allocation into a dollar amount and share count, and derives a stop distance from account size and a chosen risk percentage. The author presents this as a way to reduce exposure when estimated risk rises, especially for fat-tailed markets. However, the implementation is labeled simplified and supplies no empirical comparison or validation. Its normalization depends on a rolling range, and the displayed EVaR percentage is the normalized reading rather than the raw risk estimate; the stop and drawdown figures are formula-based illustrations, not guaranteed loss limits.

Key ideas

• The script estimates EVaR from recent returns using a q-exponential approximation and user-selected parameters.
• It normalizes the estimate against its recent range to create a display gauge.
• Recommended allocation decreases as the normalized gauge rises, subject to a minimum adjustment factor.
• The share quantity and stop distance are derived from account size, allocation, price, and chosen risk percentage.
• The document provides no backtest or evidence that the simplified estimate predicts tail losses or improves outcomes.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.