D-VaR position sizing

Modified on 2011/01/14 15:10 by Eugene — Categorized as: PosSizers

The D-VaR position sizing method was created by David Varadi. It's based on the concept of Value at Risk (VaR) - a widely used measure of the risk of loss in a portfolio based on the statistical analysis of historical price trends and volatilities.

The PosSizer will:

  1. Take the "rolling" daily returns for an instrument, according to the specified sample period
  2. Calculate the 5th percentile of returns (aka "max tail loss")
  3. Accept a risk level expressed as a maximum daily loss. The default value is 1% (conservative), risk seekers can enter higher values e.g. 1.5% (aggressive)
  4. Calculate the position size as the risk level divided by the absolute value of the "max tail loss"

Additionally, there are two options: to set a maximum percentage size the position may not exceed, and the ability to treat the "max tail loss" differently for long or short trades. If you believe that for short positions, the risk of price going in the opposite direction is represented by the positive price changes only (and vice versa for longs), enable this option. Otherwise, the PosSizer will be looking for the absolute value of daily changes regardless of the position type.

Note: for a reason, with the option to differentiate between long and short trades, Alerts are zero sized.

For more information, review the original article by D.Varadi: Introduction to D-VaR Position Sizing (Part 1)