Risk management teams in commodities markets focus on how far prices can swing, not just their direction. The Average True Range (ATR) is a key tool for this, measuring the typical daily price movement. On the daily corn futures chart (CBOT:ZC1), the ATR has roughly doubled from around 6 to around 12 over the past few months. This means the same trading position now carries about double the risk compared to earlier in the year.
Effective risk managers adjust their position sizes as volatility changes, rather than reacting after losses occur. A simple method for sizing positions is: Position size = amount you’re prepared to lose ÷ (2 × ATR). This approach ensures the position aligns with current market conditions. When ATR rises, the position size shrinks, and when ATR falls, it can expand while maintaining consistent risk levels.
Technical analysis isn’t just for traders; risk teams, portfolio managers, and commodity buyers also use charts as part of their decision-making processes. This insight is part of the Society of Technical Analysts’ educational series, “Who Reads Charts?”