Saturday, June 11, 2011

Learn some basics on How the Turtles Manage Their Risk

Turtles are what we trained a group of traders Richard Dennis and William Eckhardt of the most famous experiment in trading calls. I wrote a series of articles on the turtle trade, the story behind Wall Street legend. In this article we will learn about sea turtles, their methods millionaire.

A key to the success of sea turtles is how to manage their risk, or risk management. Risk management is mentioned in many names. Sometimes you will find him a money management and position size.

For the turtles, they managed their risk by starting with the measurement of daily market volatility. They taught the volatility is measured by the Average True Range, or ATR. Also known as "N" that can be derived in the following

1. The distance from today's high-low now.
2. The distance from yesterday's close in today's highly
3. The distance from yesterday's close to the current low

The true range is the values ​​of these three options. For the average True Range, the moving average of the True Range. For example the 20-day ATR can be easily calculated by taking the last twenty real reach, add them up and divide by 20. Repeat every day dropping off the oldest real range.

Let the following example for calculating 5-day ATR.

DAY1: OPEN 512.00, 521.50, HI, LO 511.25, 516.50 CLOSE
Day2: OPEN 517.00, 524.00, HI, LO 513.00, 521.50 CLOSE, 11:00 TR1, TR2 7.50, 3.50 TR3
Day 3: OPEN 521.00, 523.50, HI, LO 515.50, 518.00 CLOSE, TR1 8.00, 2.00 TR2, TR3 6.00
Day 4: OPEN 510.00, 515.00, HI, LO 505.50, 506.00 CLOSE, TR1 9.50, 3.00 TR2, TR3 12.50
Day5: OPEN 508.00, 513.00, HI, LO 508.00, 511.00 CLOSE, 5.00 TR1, TR2 7.00, 2.00 TR3
DAY6: OPEN 519.00, 527.50, HI, LO 515.00, 524.00 CLOSE, TR1 12.50, 16.50 TR2, TR3 4.00, 5-day ATR = 5.6

When the turtle provided by ATR or "N", they also know the stop level because they are taught to put their stops in 2N.

They also said that only 2% of their capital risk per trade. If they are $ 100,000, they risk only $ 2,000 for each trade.

Consider the following examples of tortoises position sizing.

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

Therefore, the position size is $ 2000 / 2n = 200.

That's that! An example of risk management.

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