Course Name: Futures Trading: Concepts & Strategies, Section No: 13, Unit No: 4
Stop Distance = 3 x Daily Std Dev, but used with Volatility Parity, is changed to Stop Distance = 3 x Risk Factor. RF is subjective and don't reflect the fast or slow market. Why the change?
Hi Alejandro,
When using volatility parity, the stop loss is adjusted to align with the risk factor. Instead of setting the stop purely based on the daily standard deviation, it's set based on a multiple of the risk factor. This means the stop is now a function of the risk level you're willing to accept in your portfolio. The shift from a fixed multiple of daily standard deviation to using a risk factor within the Volatility Parity framework ensures that stop-loss distances are consistent with the overall risk management strategy, making them more adaptable and appropriate for managing risk in a diversified futures portfolio.