Way of the turtle

The Science of Controlled Risk
Money management refers to managing the size of market risk
to ensure one’s ability to keep going through the inevitable bad
periods that every trader experiences. Money management is the
science of keeping your risk of ruin at acceptable levels while
maximizing your profit potential. 
The Turtles used two approaches to money management. First,
we put our positions in small chunks. That way, in the event of a
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Way of the Turtle

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losing trade we would have a loss on only a portion of a position.
Rich and Bill called those chunks units. Second, we used an inno-
vative method they devised for determining the position size for
each market. The method is based on the daily movement of the
market either upward or downward in constant dollar terms. They
determined the number of contracts in each market that would
cause them all to move up and down by approximately the same
dollar amount. Rich and Bill called the volatility measure N,
although it now is known more commonly as average true range.
That is the name given to it by J. Welles Wilder in his book New
Concepts in Technical Trading Systems.
Since the number of contracts we traded in each market was
adjusted for the volatility measure, N, the daily fluctuations for any
specific trade tended to be similar. The concept of adjusting trade
size on the basis of volatility (position size) has been written about
by others, most notably by Van Tharp in his 1998 book Trade Your
Way to Financial Freedom and the second edition of that book, pub-
lished in 2007. However, in 1983 this was an extremely innovative
concept. At that time most traders adjusted their position sizes in
various markets on the basis of loose subjective criteria or the bro-
ker’s margin requirements, which were based only loosely on
volatility.