We know that volatility is derived from the past changes of the securitys price and we know it is calculated by multiplying the square root of time in years with the standard deviation of the securitys price within that timeframe.
What I am interested about, is using it to determine position sizes and its effects on reducing losses. Volatilty can work on one´s favor or it can also lead to major losses. The volatility index is known as the "fear index" which indicates the bad times for stock options.
Volatility adjusted positions are crucial for reducing risk. A position could be determined by subtracting the current volatility percentage from 1 and multiplying the factor with the usual contract size. Obviously your broker must offer splittable contracts or then you have to trade large amounts to enter such positions. Also cfd (contracts for difference) brokers offer microlots to trade with.
VAP. = (1- Vola%) * contract size
or
VAP.= (1-√T*σ) * contract size
or
VAP.= (1-√T*σ) * contract size