Way of the turtle

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Way of the Turtle

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would be equal to 1 percent of our account size. For a $1 million
trading account, this was $10,000. So, we would look at the dollar
amount represented by 1-ATR of price movement in that particu-
lar market and then divide $10,000 by that number to determine
the number of contracts we could trade for every $1 million in trad-
ing capital that Rich had allocated to us. We referred to these num-
bers as the unit size. Markets that were volatile or had larger
contracts had smaller unit sizes than did markets that were smaller
or less volatile.
Rich and Bill no doubt had noticed some things that anyone
who has traded for a period of time is aware of: Many markets are
highly correlated, and at the end of a large trend when the bad days
come, it seems that everything moves against you at once; even
markets that normally do not seem correlated become so on those
volatile days when a large trend disintegrates.
Recall the October 1987 overnight price shock. Almost every
market we were in moved against us significantly that day. To
counter that effect, Rich and Bill imposed some limits on our trad-
ing: First, we could put on a maximum of only 4 units per market;
second, we could put on a maximum of only 6 units in markets that
were highly correlated; third, we could put on a maximum of only
10 units in any given direction (i.e., 10 long or 10 short). That num-
ber could be raised to 12 if there were positions in uncorrelated
markets. These limits probably saved Rich more than $100 mil-
lion that day. If they had not been in place, our losses would have
been staggering.
I often have seen people claim to have tested the historical per-
formance of the Turtle system and state that those methods did not
work well or were not profitable. They would make statements
Risk and Money Management
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such as: “I implemented every rule except the unit limits.” The unit
limits were an integral and extremely important part of our system
because they served as a mechanism for filtering out trades in lag-
ging markets.
Interest-rate futures provide a good example. We traded four dif-
ferent interest-rate markets as Turtles: eurodollars, U.S. Treasury
bonds, 90-day Treasury bills, and two-year Treasury notes. During
a move of any reasonable duration there would be entry signals in
all four markets. We generally would hold positions in only two of
them at any specific time: The first two that had signaled. 
The same thing generally held for foreign currency futures. We
traded the French franc, the British pound, the German mark, the
Swiss franc, the Canadian dollar, and the Japanese yen. However,
at any given time we typically would have a position in only two or
perhaps three of those markets.
For this reason, having unit limits kept us out of a lot of losing
trades. The markets that signaled last often did not move nearly as
far and were more likely to result in losses.