Hello, for the past weeks I have been studying and writing a strategy program on NT7 following the Turtle Rules. Specifically, the Original rules found here http://bigpicture.typepad.com/comments/files/turtlerules.pdf For the most part I understand well and have been able to implement. However, On Chapter 3 "Position Sizing" (page 16) "Units as a measure of risk", I do not understand the the chart with the Maximum Number of units. Code: [from the book] The Turtles were given risk management rules that limited the number of Units that we could maintain at any given time, on four different levels. In essence, these rules controlled the total risk that a trader could carry, and these limits minimized losses during prolonged losing periods, as well as during extraordinary price movements. Level Type Maximum Units 1 Single Market 4 Units 2 Closely Correlated Markets 6 Units 3 Loosely Correlated Markets 10 Units 4 Single Direction â Long or Short 12 Units I read the text many time trying to understand but I still do not understand how this works. for example: Single Market 4 units, Single direction 12 ... ??? "Single Markets" obviously includes a "Single Directions". So when is 4?, when is 12 units?. Or 6 units in "closely correlated markets"?? I am sure this is not too difficult but I can figure it out. Would appreciate if some guru would be able to explain it in a different way or point me to any other doc out there. Thank you in advance! In case it interest anyone, this is so far my interpretation of the Original Turtle Rules: Code: Size One unit = ( 0.01 * [Account Size] ) / ( [20 days ATR] * Stock Price) Notional Account Size Decrease [Account Size] by [Account Size] - (0.1 * [Account Size]) on losses. Entry Enter one long/short unit when Stock hits a [20 days high/low] Increment by one unit when: Stock Price + (0.5 * [20 days ATR]) Risk Increment up to and no-more than: 4 Units for single markets 6 Units Closely Correlated Markets 10 Units Loosely Correlated Markets 12 Units Single direction - Long or Short Stop-loss Stop price for long: [Stock Price] - (2 * [20 days ATR]) Stop price for short: [Stock Price] + (2 * [20 days ATR]) Exit Type 1: [10 days high/low] Type 2: [20 days high/low]
Single direction (long or short) is max 12 units. Single market is max 4 units. Therefore you can only be long max 12 units. So it might be long 4 crude oil, 2 long heating oil, 4 long gold, 2 long silver. 12 limit reached, you cant now be long any other market. If you now get a signal to go long S&P you have to ignore it. That my interpretation anyway. Thats pretty restrictive, given there are about 20 markets in the list. But the document Author says the Turtles were trading as a group, and each Turtle was able to pick different subsets of the markets on the list to trade. So the combined group limits would have been much higher. If you halve the max risk per position (1% as the max risk per position instead of 2%), you could use 24 units as the limit in each direction (long or short) instead of 12 units.
Thank you southall! It makes sense, but as you mentioned it is pretty restrictive specially considering that the unit size is highly defendant on volatility. but I guess managing risk is a top priority on this kind of trading. As you said lowering the risk per trade will allow for more diversification, however I think it could drastically affect the performance of the system as it might exit the waves too early. Thank you for your reply. -msdavid
Going from 12 to 24 units because of lowering the risk percentage is not a good idea... The rule of max 12 units is for the fact that all great trends, allthough they can be in an uncorrelated market, starts to correlate in the end of the (big) trend that is correlated to an economy. The end of 2004,2005 and 2009,2010 is an example of many uncorrelated market behaving the same...
Good point, danielc1 will have to digest all this. I am still trying to figure out what markets to trade and how to pick the right commodities/stocks. (have no idea at this point) Thank you.
Thats why you cut the risk in half, if they correlate your is risk no more than your original risk anyway. eg Risk 2% in gold... or 1% in gold and 1% in S&P500 Now if gold and s&p 500 perfectly correlate for a while your risk is still no worse than going 2% all into gold and 0% in the S&P.
Your thinking is absolutly right in terms of risk, but you also need to think about the risk on, risk off between long and short and what it will do to your portfolio if suddenly al the uncorrelate 'long' position correlate. You can have 24 units with half the risk or 12 units with the normal risk. In risk terms and percentages, they look the same. In real world example of correlation, 24 units will represent a greater amount of asset allocated to a 'long' position across a broader market, then a 12 unit limit...
Turtles were using position sizing to stops. So if you decide to half the risk you also half the number of contracts traded on each position. So i cant see how having 6 positions at half size/half risk can ever be more risky than having 3 positions on at full size/full risk. Worst case they will be equally risky if all markets correlate. Lets say my max risk is 2% per position in 3 markets or 1% risk in six markets. All markets correlate and every postion is stopped out as a loser. In both cases i lose 6% of my account.
Again you are right in regards to risk... But you do not consider the probability of your portfolio in regards to the direction of the markets you are trading. Maybe an example will make it clear: Example 1 max 3 units 100000 1000|price|atr| risk|Amount| allocated to long 1% 1 |30|5|200|6000 2 |50|2|500|25000 3 |60|6|167|10000 Total: 41000 Risk 3% in total Precentage alocated to long 41% Example 2 0.50% 500 1 30 5 100 3000 2 50 2 250 12500 3 60 6 83 5000 4 100 2 250 25000 5 70 3 167 11666 6 20 1 500 10000 Total: 67166 Risk 3% in total Precentage allocated to long 67% Difference: Example 2 has more direction heat then example one. The 12 unit rule has been created to create a 'balance' between short and long direction heat... It had nothing to do with the risk you would take...