Volatility – The Meaning of N

The Turtles used a concept that Richard Dennis and Bill Eckhardt called N to represent the underlying volatility of a particular market.

N is simply the 20-day exponential moving average of the True Range, which is now more commonly known as the ATR. Conceptually, N represents the average range in price movement that a particular market makes in a single day, accounting for opening gaps. N was measured in the same points as the underlying contract.

To compute the daily true range:

True Range = Maximum (H-L, H-PDC, PDC-L)

where:
H – Current High
L – Current Low
PDC – Previous Day’s Close

To compute N use the following formula:

N = (19 x PDN + TR)/20

where:
PDN – Previous Day’s N
TR – Current Day’s True Range

Since this formula requires a previous day’s N value, you must start with a 20-day simple average of the True Range for the initial calculation.

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Position Sizing

The Turtles used a volatility-based constant percentage risk position sizing algorithm.

Position sizing is one of the most important but least understood components of any trading system.

The Turtles used a position sizing algorithm that was very advanced for its day, because it normalized the dollar volatility of a position by adjusting the position size based on the dollar volatility of the market. This meant that a given position would tend to move up or down in a given day about the same amount in dollar terms (when compared to positions in other markets), irrespective of the underlying volatility of the particular market.

This is true because positions in markets that moved up and down a large amount per contract would have an offsetting smaller number of contracts than positions in markets that had lower volatility.

This volatility normalization is very important because it means that different trades in different markets tend to have the same chance for a particular dollar loss or a particular dollar gain. This increased the effectiveness of the diversification of trading across many markets.

Even if the volatility of a given market was lower, any significant trend would result in a sizeable win because the Turtles would have held more contracts of that lower volatility commodity.

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Markets: What the Turtles Traded

The Turtles traded liquid futures that traded on U.S. exchanges in Chicago and New York.

The Turtles were futures traders, at the time more popularly called commodities traders. We traded futures contracts on the most popular U.S. commodities exchanges.

Since we were trading millions of dollars, we could not trade markets that only traded a few hundred contracts per day because that would mean that the orders we generated would move the market so much that it would be too difficult to enter and exit positions without taking large losses. The Turtles traded only the most liquid markets.

In general, the Turtles traded all liquid U.S. markets except the grains and the meats. Since Richard Dennis was already trading the full position limits for his own account, he could not permit us to trade grains for him without exceeding the exchange’s position limits.

Liquidity
The primary criterion used to determine the futures that could be traded by the Turtles was the liquidity of the underlying markets.

We did not trade the meats because of a corruption problem with the floor traders in the meat pits. Some years after the Turtles disbanded, the FBI conducted a major sting operation in the Chicago meat pits and indicted many traders for price manipulation and other forms of corruption.

The following is a list of the futures markets traded by the Turtles:

Chicago Board of Trade

• 30 Year U.S. Treasury Bond
• 10 Year U.S. Treasury Note

New York Coffee Cocoa and Sugar Exchange

• Coffee
• Cocoa
• Sugar
• Cotton

Chicago Mercantile Exchange

• Swiss Franc
• Deutschmark
• British Pound
• French Franc
• Japanese Yen
• Canadian Dollar
• S&P 500 Stock Index
• Eurodollar
• 90 Day U.S. Treasury Bill

Comex

• Gold
• Silver
• Copper

New York Mercantile Exchange

• Crude Oil
• Heating Oil
• Unleaded Gas

The Turtles were given the discretion of not trading any of the commodities on the list. However, if a trader chose not to trade a particular market, then he was not to trade that market at all. We were not supposed to trade markets inconsistently.

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