Way of the turtle

Risk Per Trade (%)
Figure 8-1
Drawdown versus Risk
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plex formulas and written entire books about money management.
It shouldn’t be that complicated. 
Proper money management is quite simple. For a trading
account of a particular size, you can safely buy a certain number
of contracts in each futures market. For some markets and for
smaller accounts this amount may be zero.
For example, the natural gas (NYMEX symbol NG) contract ear-
lier this year had an ATR that represented more than $7,500 per con-
tract. Remember, this means that the value of the contract fluctuated
$7,500 on the average each day. Thus, for a system that used a 2-ATR
stop such as the Donchian Trend system, a single trade could mean
a loss of $15,000. If you were trading an account as large as $50,000,
this would represent 30 percent of the account. Most people would
say that risking 30 percent of your trading account on one trade is a
really bad idea. Therefore, a prudent number of contracts of NG to
trade would be zero for an account of $50,000. Even for an account
as large as $1 million, such a trade would represent a 1.5 percent risk
level, which many would consider fairly aggressive.
Trading with too much risk is probably the single most common
reason for failure among new traders. Often novices trade so aggres-
sively that a small string of losses will wipe out their trading capital.
New traders often misunderstand the dangers of leverage, and
because their broker and the exchange permits them to buy and sell
large contracts with as little as $20,000, they often do precisely that.
Risk of Ruin Revisited
Earlier we discussed the concept of risk of ruin: The possibility of
losing so much capital as a result of a string of losses that one is
Risk and Money Management
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forced to quit trading. The definition as most people use it applies
to a random set of outcomes using a fairly simplistic formula based
on probability theory. Most people think in terms of the risk that
you will experience ruin due to a bad period of losses in rapid 
succession. I believe that this is not generally what brings traders
to ruin. Traders do not fall prey to a period of randomly adverse 
market behavior very often. It is far more likely that they have made
some serious mistakes in their analysis.
Here is what I believe accounts for a trader’s lack of success in
trading commodities:
• No plan: Many traders base their trades on hunches, rumor,
guesses, and the belief that they know something about the
future direction of prices.
• Too much risk: Many otherwise excellent traders have been
ruined because they incurred too much risk. I’m not talking
about 50 percent or 100 percent more risk than is prudent. I
have seen traders who trade at a level that is 5 or 10 times
more than I consider prudent even for aggressive trading.
• Unrealistic expectations: Many new traders trade with too
much risk because they have unrealistic expectations about
how much they can earn and what sorts of returns they can
achieve. This is often also the reason new traders believe
they can start trading on the basis of fundamental data; they
believe they are smart enough to “beat” the market with
little or no training and very little information.
When I started working with futures trading systems in high
school, I noticed something rather odd: A very high percentage of