Way of the turtle

110
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Way of the Turtle

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strong, but only if you don’t lose everything and have to start over
again. If you begin with $50,000, you will have almost $10 million
after 20 years—if you can earn 30 percent returns.
Trying to go for very aggressive returns of 100 percent or 200 per-
cent per year greatly increases the chances that you will blow up
and have to stop trading. I highly recommend taking a conserva-
tive approach for the first several years of trading.
Consider what would have happened if you had been trading
with the Donchian Trend system in 1987 at aggressive levels. Fig-
ure 8-1 shows the drawdowns that are encountered as the risk lev-
els increase.
Note how the graph rises steadily and levels off at the 100 per-
cent point. This means that if you were trading aggressively and
risking 3 percent of your trading capital on each trade, you
would have gone bust overnight because this drawdown is due
entirely to that single day when the interest-rate markets
reversed precipitously.
For most people, a prudent way to trade would be at a level that
demonstrates a drawdown, using historical simulations, that is at
most one-half the level you believe you can tolerate. This will pro-
vide a buffer in case the system has a drawdown that is larger than
what previously had been seen during testing. It also will make it
less likely that an unexpected price shock will cause you to lose all
your trading capital.
Don’t Believe Everything You Hear
Many people have touted money management as a magical elixir
that can cure all that ails your trading. Others have devised com-
Risk and Money Management
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111

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Max Drawdown as Risk Per Trade (%) Varies
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
4.0%
3.
9%
3.8%
3.7
%
3.6%
3.
5%
3.
4%
3.3%
3.2%
3.1%
3.0%
2.9%
2.8%
2.7%
2.6%
2.5%
2.4%
2.3%
2.2%
2.1%
2.0%
1.9%
1.8%
1.7%
1.6%
1.5%
1.4%
1.3%
1.2%
1.1%
1.0%