How the Turtles Manage their Risk?

By Taro Hideyoshi

Turtles are what we call a group of traders trained by Richard Dennis and William Eckhardt in the most famous experiment in trading. I wrote a series of articles about turtle trading, the story behind Wall Street legend. In this article, we will learn more about the turtles, the techniques that made them millionaires.

A key of success for the turtles is how they manage their risk or risk management. Risk management is called in many names. Sometime you will find it called money management or position sizing.

For the turtles, they manage their risk by starting with the measurement of daily market volatility. They were taught to measure volatility by using the Average True Range, or ATR. It also known as “N” which can be derived from the following

1. The distance from today’s high to today’s low.
2. The distance from yesterday’s close to today’s high
3. The distance from yesterday’s close to today’s low

The true range is the maximum values of these three choices. For the Average True Range, it is the moving average of the true range. For Example the 20-day, ATR can be simply calculated by taking the last twenty true ranges, add them up, and divide by 20. Repeat each day by dropping off the oldest true range.

Let consider the following example for 5-day ATR calculation.

DAY1: OPEN 512.00, HI 521.50, LO 511.25, CLOSE 516.50
DAY2: OPEN 517.00, HI 524.00, LO 513.00, CLOSE 521.50, TR1 11.00, TR2 7.50, TR3 3.50
DAY3: OPEN 521.00, HI 523.50, LO 515.50, CLOSE 518.00, TR1 8.00, TR2 2.00, TR3 6.00
DAY4: OPEN 510.00, HI 515.00, LO 505.50, CLOSE 506.00, TR1 9.50, TR2 3.00, TR3 12.50
DAY5: OPEN 508.00, HI 513.00, LO 508.00, CLOSE 511.00, TR1 5.00, TR2 7.00, TR3 2.00
DAY6: OPEN 519.00, HI 527.50, LO 515.00, CLOSE 524.00, TR1 12.50, TR2 16.50, TR3 4.00, 5-day ATR = 5.6

Once the turtles determined the ATR or “N”, they would also know the stop level since they were instructed to place their stops at 2N.

The were also told to risk only 2% of their capital on each trade. If they have $100,000, they would risk only $2000 for each trade.

Consider the following example of turtles position sizing.

Suppose N = 5 and the trading capital on hand is $100,000.
So they can risk only $2,000 for each trade.

Therefore the position size will be $2000 / 2N = 200.

That’s it! A example for risk management.

About the Author

Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.

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