Way of the turtle


Rules for Estimating Risk


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Way of the turtle the secret methods of legendary traders PDFDrive

Rules for Estimating Risk
One of the best ways to determine the risk a particular system may
represent or the risk inherent in holding a position is to look at the
major price shocks that have occurred over the last 30 to 50 years.
If you look at those catastrophic days and consider what would have
happened to a set of likely positions, you can determine what
amount of risk would have resulted in a 50 percent drawdown or
the amount it would have taken to go completely bust. Using com-
puter simulation software, it is easy to see what positions you would
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Way of the Turtle


have held on those days and what sort of drawdowns are repre-
sented by those positions.
Now consider what would happen if something even worse had
occurred. It may be unpleasant to think about such things, but they
can happen, and you need to plan for them. What would have hap-
pened to your positions if instead of their attack on the World Trade
Center, al-Qaeda had detonated a nuclear bomb somewhere else
in Manhattan? What would have happened if a disaster of equal
magnitude had taken place in Tokyo, London, or Frankfurt?
Anyone trading aggressively will be much more likely to lose
everything in the event of a disaster of unprecedented scale. This is
something to keep in mind as you hear the siren call of 100 percent-
plus returns.
Risk and Money Management

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123

nine
TURTLE-STYLE
BUILDING BLOCKS
Don’t spend all your time admiring the fancy tools 
in the magazines. First learn how to use the basic ones well. 
It’s not the size of your tools that counts but how well you use them.
C
hapter 2 provided an overview of the various market states: sta-
ble and quiet, stable and volatile, trending and quiet, and
trending and volatile. I also pointed out the importance of being
able to identify the state of the market you are trading in since
many systems are designed to keep you out of that market when it’s
in a state that is not favorable given their trading styles. 
I refer to the tools that indicate market states as building blocks.
Some building blocks have specific names such as indicatorsoscil-
lators, and ratios, but I group them all into the more general cate-
gory. This chapter focuses on the building blocks for trend-following
systems. These are tools that indicate when the market may have
moved from a stable state to a trending state and, conversely, when
it has moved back to a stable state. Simply put, they indicate when
a trend may have started and when it may have ended.
Copyright © 2007 by Curtis M. Faith. Click here for terms of use. 


Unfortunately for traders, there are no building blocks that work
all the time, no secret formulas that lead to an easy fortune. The best
we can do is find tools that help us identify times when the odds that
a trend has started or ended have improved. This is sufficient for our
purposes since it is possible to make good returns even when the odds
are only slightly in your favor (ask your favorite casino owner).

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