Scaling Stock Positions by Momentum and Volatility Estimates

Summary

The document outlines a way to weight stock positions using a momentum signal and an estimate of volatility. It describes two alternatives: an exponentially weighted moving average based on squared returns, and a Yang–Zhang variation of Garman–Klass volatility. The proposed signal uses the direction of a longer-term price change and divides by a volatility measure, with the resulting values used as relative position weights. An example illustrates assigning different position sizes to two stocks in proportion to their displayed values.

The author says this method is intended for use with a separate stock screener and suggests applying it across a portfolio of at least 20 to 30 stocks. The document does not provide backtest results, clarify whether the weights are normalized or risk constrained, or discuss trading costs and exposure limits. Its code and explanation should therefore be treated as a sizing sketch, not evidence of portfolio performance; implementation details also need review before use.

Key ideas

• The proposed sizing method combines price direction with an inverse volatility measure.
• It offers an EWMA estimate based on squared returns and a Yang–Zhang style volatility alternative.
• The displayed values are intended to set relative stock position weights alongside a separate screener.
• The author recommends using the approach across a portfolio of at least 20 to 30 stocks.
• The document supplies no performance tests or guidance on normalizing weights and controlling total portfolio risk.

Tags

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