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"Volatility is the most important criteria behind our strategy." - Nigol Koulajian
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This episode is all about volatility breakout models, sharpe ratio, CTAs, volatility expansion, tail risk, volatility filter, trend following trigger and much, much more.

The Original Turtle Trading Rules, The Presentation.

Position Sizing Rules

October 4, 2011 (Last updated on May 28, 2013) by Andriy Moraru
Following a small discussion I had about advantages and disadvantages of using different position sizing techniques in the ATC 2011 championship of the expert advisors I decided to talk a bit more about various position sizing rules that can used in Forex trading. Its a very important topic and this blogs readers agree with this thesis. In my opinion, there are 5 main types of position sizing techniques:

1. Fixed position size
2. Martingale position sizing
3. Fixed fractional position sizing
4. ATR-based position sizing
5. Risk-based position sizing

Below I try to explain more about each of these systems of rules.

Fixed position size
Probably the most widely used position size a trader just uses a fixed lot size (for example, 1 standard lot) on all the positions. The technique is very simple to implement both manually and in expert advisor. It doesnt require any calculations. The problem is that its very limited and can be quite dangerous (if the fixed size is too high).

The income of the trader doesnt rise with the growth of the account balance so the trader isnt earning profit that would be earned by employing some other position sizing models. When a trader sets fixed position size to some large amount compared to the account balance, theres a danger that the account will get wiped out in case of a continuous losing streak.
For my ATC 2011 EA Ive chosen this type of position sizing because it offers a very fast buildup of balance in the beginning and becomes less aggressive in the end. So far Ive been lucky with it: after one big loss, 2 positions are showing nice profit. Nevertheless, I dont recommend this position sizing system for your real account trading.
Example: Every positions volume is set to 3 standard lots.

Martingale position sizing
If you think that the fixed position sizing is dangerous, then Martingale position sizing is definitely not for you. The main rule of this technique is to increase your position size as you take losses. Its derived from Martingale gambling system, which involves doubling your bet anytime you lose and was very popular back in XIX century; it is still popular among some gamblers and Forex traders. This system offers a sure-fire money winning method for a trader with the infinite account balance, but, unfortunately, even George Soros account isnt infinitely big.

In Forex, Martingale position sizing is somewhat popular partially because it offers a comfort of potential revenge on the market. A trader doubling a position size after a loss is hoping to get back what was lost and also gain some profit at the same time. In reality, a streak of 56 losses in a row usually leaves the trading account empty.

Example: Using one lot as a position size, youve lost $1,000 on a trade. You increase the next positions size to two standards lots to double your potential profit (to cover your previous loss). If that one is lost too, you double the position size again to 4 standard lots, and so on.

Fixed fractional position sizing
This system is often called reverse Martingale, because here a trader increases position size after a winning trade and decreases it after a losing trade. The idea is to minimize the risk of ruin and to increase exponentially the income in case of a continuous profitability of the employed trading strategy.

Although, its probably the most effective and safe position sizing systems for Forex, unfortunately, it also has its disadvantages. The biggest of them is that it works poorly with trading strategies that often involve losses after huge wins such position sizing would then increase the loss, decreasing the overall strategys performance. Ive dropped this method specifically because of that disadvantage, as my ATC 2011 EA often shows significant losses after winning a trade. Second disadvantage is a rather slow buildup of the account balance compared to fixed position sizing if moderate fraction ratio is used.

Example: Your account balance is $7,500. You decide to set your position size to 0.01% of your account size. $7,500 * 0.01% = 0.75 lot. So you set your position volume to 0.75. If you win, lets say, $500, your balance increases to $8,000, and 0.01% of it will be 0.8 lot. If you lose, lets say, also $500, your balance becomes $7,000, and 0.01% of it will be 0.7 lot.

As you see, it is a very flexible position sizing system because you can vary the ratio and thus the risk according your preference.

ATR-based position sizing
Actually, it is just an additional rule for the fixed fractional position sizing technique (but can be used with any of them). It involves position size normalization according to the current value of Average True Range (ATR) indicator. ATR shows the volatility of the market. As ATR increases, a smaller position size would be advised because volatile market has a higher chance of pushing the trade out of its planned way. As ATR decreases, a bigger position can be opened as there is presumably less probability of a price spike to hit the stop-loss.

This position sizing add-on is useful for the trending Forex strategies and can be harmful for range trading where spikes can be useful to hit take-profit.

Example: Your account balance is $10,000 and you decide to set your position size to 0.02% of the account size. You are trading EUR/USD and consider ATR = 0.00100 as a normal value. Calculate fixed fractional position size: $10,000 * 0.02% = 2 lots. The current ATR is at 0.00221 (which means more than double normal volatility). Calculate ATR-adjusted position size:2 lots / (0.00221 / 0.00100) = 0.905. So, you set your position volume to 0.905 lot (or, if your broker does not allow using one thousandth fractions of a lot, 0.91 lot). Then this position wins you $2,700. For the next position you recalculate the fixed fractional position size: $12,700 * 0.02% = 2.54 lots. The FX market is raging with volatility and ATR on EUR/USD has risen to 0.00562. Now, recalculate the ATR-adjusted position size: 2.54 lots / (0.00562 / 0.00100) = 0.452 lot (or 0.45).

This method to adjust position size is extremely adaptive but due to the amount of required calculations is better used with the automated Forex expert advisors rather than manually.

Risk-based position sizing
This one is also an addition to the other position sizing rules and is more popular with the fractional position sizing too. While, usually, a Forex trader bases the position size solely on the size of the account, here, one would also apply the size of the stop-loss of the particular position. The main idea with risk-based position sizing is to limit the potential loss to some fraction of the account balance based on the stop-loss.

Example: Your account balance is $12,000 and your stop-loss is set to 40 pips (normal pips), and you want to risk no more than 1.5% on your next EUR/USD trade. Calculate the maximum risk in dollars:$12,000 * 1.5% = $180. 1 pip is worth $10 on 1 standard lot of EUR/USD. Calculate the position size:$180 / (40 pips * $10) = 0.45. That is, if you want to risk no more than 1.5% on this trade with the given balance and stop-loss, you may open a position of 0.45 standard lot volume.
To calculate position size for risk-based method easily, you can use our free online Forex position size calculator.

Conclusion
Some traders also use no position sizing rules in Forex at all. Thats not a very professional trait. Position sizing can help you to improve the strong points of the trading strategy and decrease the chance of ruining the live trading account. If you know traders that still size their positions chaotically, direct them to this article, please :-).

A great place to look into the Past, Present and Future of Quant trading models.
http://alvarezquanttrading.com/

The 5 money management and position sizing secrets of the Turtle Traders

The Turtle traders were a legendary group of traders coached by two successful traders, Richard Dennis and William Eckhardt. They selected 10 people (turtles) with little to no prior trading experience and turned them into winning traders by providing them with a set of very precise trading rules.
The building block of the turtle traders success was their advanced risk and money management and their position sizing approach. The following 5 principles explain the most important risk and management principles of the turtle traders strategy.

1. Volatility based stop loss orders of the turtle traders

The turtle traders used a volatility based stop loss order, which means that they determined the size of their stop loss based on the average ATR indicator (Average True Range). This also means that for every trade, they used a different stop loss size to react to changing market conditions.
The charts below show why this stop method is so powerful. Both charts show a breakout scenario with very different price dynamics. Whereas the left chart has very small candlesticks and a low ATR (low volatility), the right chart shows larger candlesticks and a higher ATR value (high volatility). How much sense would it really make to use the same stop loss technique on both breakout trades? Correct, it wouldnt make any sense. A trader should use a small stop loss for the trade on the left chart and a wider stop loss on the right chart to maximize his reward:risk ratio and to minimize the chances of getting stopped out during insignificant retracements.

http://www.tradeciety.com/wp-content...rtle_stop1.png
http://www.tradeciety.com/wp-content...rtle_stop2.png

¡. Setting a stop further away in times of higher volatility and closer when volatility is low, allows the trader to react to changing market conditions and optimize his reward:risk ratio and risk profile.

2. A maximum position of 2%

Although the stop loss size (in point distance) changed for every trade, the risked always stayed the same. The maximum allowed risk (position size) on any one trade was 2% of the current total account balance. The table below shows two examples of how the turtle traders would adjust their stop and position size based on volatility.
Although the risk is identical (2% or $ 2,000), the turtle traders have to buy more contracts during lower volatility because the stop loss is set closer.

Always determine the stop loss distance first. Most amateur traders start by evaluating how many contracts they want to buy and then set their stop loss order so they can achieve a random risk goal. Never start by thinking how many contracts you want to buy/sell before you know your stop loss.

3. Correlations and risk

If the turtle traders want to enter two trades in different instruments, they had to look at the correlation between the two markets first.

¡. A quick reminder: correlations describe how similar two markets move. A positive correlation means that the two markets move in the same direction and a negative correlation means that they move in opposite directions.

http://www.tradeciety.com/wp-content...rrelation1.png
http://www.tradeciety.com/wp-content...rrelation2.png

The two charts above show two different scenarios. On the left, you see two price charts with a very high positive correlation (the two graphs almost move identical). On the right, you see two charts with a negative correlation (they move in opposite directions).
A trader who enters two trades in the same direction (two buy or two sell trades) on positively correlated markets increases his risk because it is more likely that the two trades end up the same. A trader who enters two trades in different directions (one buy and one sell trade)in positively correlated instruments will probably (not guaranteed) not have the same result.

http://www.tradeciety.com/wp-content...tradeciety.png

When trading positively correlated markets, your risk increases. When trading negatively correlated markets, you can lower your risk.

The turtle traders did not come up with this strategy, but it has been used by professionals as long as trading exists. It is the irrefutable law of how financial markets work and understanding correlations is of great importance.

4. Adding to a winner

The turtle traders usually did not enter the full position size on the first entry. Remember that they were allowed to use 2% per trade, but they usually split their order across multiple entries and added to a winner. Their first position would be 0.5% and after the trade has moved into profits, they would add another 0.5%. They would keep adding to their trade until they reached the maximum of 2%. At the same time, they moved their stop loss behind price to protect their position.
The advantages of adding to a winning trade:

1. You limit your losses. The turtle traders strategy was a breakout and trend-following strategy. On a false breakout, when price immediately reversed on them, they would usually only have a very small position and not yet have scaled in. Thus, the loss they take is only a small portion of the 2% maximum risk.
2. You can catch large winning trades and protect your position. You would only reach your full position size during high momentum breakouts and once you had reached the maximum exposure of 2%, the initial stop loss orders would already have locked in some profits.

¡. You have to minimize your losses and try to preserve capital for those very few instances where you can make a lot in a very short period of time. What you cant afford to do is throw away your capital on suboptimal trades. Richard Dennis

5. Adjusting position size during losing streaks

Dennis and Eckhardt understood that the most important thing during a losing streak is not how fast you can recoup your losses, but the degree to which you can limit your losses. Their rule to limit drawdowns during losing streaks shows this principle:
If your account drops 10%, you then trade as if your account has lost 20%. If you lost $10,000 on a $100,000 account, you then trade as if your account only has left $80,0000.
This means that even though your account is now $90,000 and your 2% would be $1,800, you only trade as if your account is $80,000 with a maximum risk of $1,600. This strategy will greatly reduce the losses once a trader enters a significant losing streak and it takes away a lot of emotional pressure as well.

This sounds like a lot of rules for just money management and position sizing. Lets briefly compare that to the turtle traders rules for trade entries:

1. You enter a trade when price breaks above its 20-day range
2. You enter a trade when price breaks above its 55-day range

You are right, not a lot of trade entry rules, although there were small variations and exceptions to the rules. The point is that the professionals understand that entry rules only have very little importance and that the most important cornerstone of any trading strategy is position sizing and risk management. This is a major reason why so many amateur traders struggle; they focus all their energy and spend all their time on the least important factor.

Great post Bass as always. Your journal is a fantastic resource for trend traders mate and so well structured. :-)

cheers Bass

Thank you guys, may the pre FOMC volatility be with you.

Model Validation “Turtle Trading System”.

Develop, back-test and implement a mechanical trend following system for a diverse portfolio of highly liquid futures markets.(The Seykota's Way)

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One More Free Data Gold Mine : http://www.trendsoft.com/datamain.htm

A goldmine of algorithm trading info, read it all .

KJ Trading Systems Kevin Davey - Ask Me Anything (AMA)

Trend Following Wizards – January
February 19th, 2016

The Trend Following Wizards started the year very well. Nearly all managers had a positive return for January and the overall result is fairly strong at +3.47% average.

MANAGED FUTURES: GOOD START OF THE YEAR
February 19, 2016 by Shane Wisdom

Managed Futures started 2016 with a good overall performance. All the managers we track in this report produced strong positive returns.
Please find below the detailed performance of the top CTAs that we follow in this index.

Bass....could you please check the link is working at your end? I am getting no luck trying to open the web page but it may be a ISP problem my end. C

Not working at my end also, the whole BMT Site is apparently down at the moment, try again later.

its working now.
https://futures.io/vendors-product-r...-anything.html

Cheers Bass :-)

Rainy and Lazy Sunday afternoon, the weekend is almost over, enjoying a good cup of coffee at my favorite starbucks with my other half .