ATR Stops and Beta-Adjusted Position Sizing

Summary

The indicator calculates theoretical long and short stop levels at a multiple of the Average True Range from the current close. It then estimates position size from account value, a base risk percentage, the stock’s beta, and the stop distance. The risk percentage is divided by beta and constrained to a stated range; the resulting risk budget determines a theoretical size. A second cap limits the position’s value as a share of the account. The final size is the smaller of those two estimates, displayed on the latest bar alongside the stop lines.

The document gives example settings, including an ATR period of 14, a stop multiplier of 2, and a maximum position allocation of 3%, but offers no backtest or empirical evidence that the settings work. It assumes the supplied beta is meaningful and does not account for gaps, slippage, fees, liquidity, or correlations with existing holdings. The result is a sizing aid and plotted reference, not a complete trade or portfolio risk system.

Key ideas

• The indicator places theoretical long and short stops a multiple of ATR below and above the close.
• It adjusts the base risk percentage inversely to beta, then constrains the adjusted percentage to a range.
• It estimates size from the risk budget and stop distance, then caps size by a maximum portfolio allocation.
• The smaller of the risk-based and allocation-based sizes is shown on the latest chart bar.
• The example provides parameter settings but no evidence of effectiveness and omits execution and portfolio risks.

Tags

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