Way of the turtle

Everybody’s Different
Each of us has a different tolerance for pain and different expecta-
tions for reward. For this reason, there is no single measure that
universally appeals to everyone. I have used a combination of the
MAR ratio, drawdowns, and overall return while keeping an eye on
smoothness by looking at the Sharpe ratio and R-squared figures.
Recently I designed some measures that are more stable versions
of these common measures. Those measures are discussed in
Chapter 12.
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Way of the Turtle

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I also try not to get too caught up in any particular figures, know-
ing that the future will be different and that the fact that a strategy
has a MAR of 1.5 at the moment does not mean it will continue to
maintain that ratio in the future.
By What Measure?
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eight
RISK AND MONEY 
MANAGEMENT
Ruin is the risk you should be concerned with the most. 
It can come like a thief in the night and steal everything 
if you aren’t watching carefully.
L
ike many of the concepts we use in trading, expectation, edge,
risk of ruin and so on, the term money management comes
from gambling theory. Money management is the art of keeping
your risk of ruin at an acceptable level while maximizing your
profit potential by choosing an appropriate number of shares or
contracts to trade, something we refer to as the size of the trade,
and by limiting the aggregate size of the position to control expo-
sure to price shocks. Good money management helps ensure that
you will continue to be able to trade through the inevitable bad
periods that every trader experiences. Most discussions of the topic
make use of countless formulas and cover different methods for
determining precisely the number of contracts one should trade.
They approach risk as if it were a definable and knowable concept,
but it isn’t. This chapter won’t duplicate those discussions. If you
Copyright © 2007 by Curtis M. Faith. Click here for terms of use. 

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want a survey of the many different methods you can use to deter-
mine the number of contracts to trade, several books listed in the
bibliography cover that topic.
I believe that money management is more art than science, or
perhaps more like religion than art. There are no right answers.
There are no best ways to define one’s risk position. There are only
individual answers that work for each person; those answers can be
obtained only by asking the right questions.
At its core, money management is about finding the trade-off
between taking so much risk that you end up losing everything or
are forced to quit trading and, conversely, taking so little risk that
you end up leaving too much money on the table. There are two
primary ways that excessive risk can force you to stop trading:
extended drawdowns that exceed your psychological limits and a
sudden price shock that wipes out the account.
Your proper level of risk is very much a function of what is impor-
tant to you. For that reason, if you want to trade, you have to become
intimately familiar with the implications of taking too much risk or
too little risk so that you can make an informed decision.
Many vendors of systems or courses on trading make it seem that
anyone can follow their methods and achieve riches quickly and
easily. They do this because it helps them sell more systems and
more courses on trading. They understate the dangers of risk and
overstate the probabilities and ease of attaining those riches. 
They are lying. The risk is real, and trading is not easy.
It is very important to keep one thing in mind before deciding
to be aggressive: Steady returns of 20 or 30 percent per year will
make you a lot of money in a reasonably short period starting with
almost any amount of money. The power of compounding is very