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.
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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