Something to bend your brain on, the following excerpt from the “Original Turtle Rules” paper that has been in circulation details the risk management rules followed by the Turtles. It may not be something to exactly follow today, but the concepts one can derive from it can be used in establishing your approach to risk management.
"The Turtles were given risk management rules that limited the number of Units that we could maintain at any given time, on four different levels. In essence, these rules controlled the total risk that a trader could carry, and these limits minimized losses during prolonged losing periods, as well as during extraordinary price movements
An example of an extraordinary price movement was the day after the October, 1987 stock market crash. The U.S. Federal Reserve lowered interest rates by several percentage points overnight to boost the confidence of the stock market and the country. The Turtles were loaded long in interest rate futures: Eurodollars, TBills and Bonds. The losses the following day were enormous. In some cases, 20% to 40% of account equity was lost in a single day. But these losses would have been correspondingly higher without the maximum position limits.
The limits were:
[B]Level: Type - Maximum Units[/B]
1: Single Market - 4 Units
2: Closely Correlated Markets - 6 Units
3: Loosely Correlated Markets - 10 Units
4: Single Direction (Long or Short) - 12 Units
[B]Single Markets[/B] – A maximum of four Units per market.
[B]Closely Correlated Markets[/B] – For markets that were closely correlated there could be a maximum of 6 Units in one particular direction (i.e.6 long units or 6 short units). Closely correlated markets include: heating oil and crude oil; gold and silver; Swiss franc and Deutschmark; TBill and Eurodollar, etc.
[B]Loosely Correlated Markets[/B] – For loosely correlated markets, there could be a maximum of 10 Units in one particular direction. Loosely correlated markets included: gold and copper; silver and copper, and many grain combinations that the Turtles did not trade because of positions limits.
[B]Single Direction[/B] – The maximum number of total Units in one direction long or short was 12 Units. Thus, one could theoretically have had 12 Units long and 12 Units short at the same time. The Turtles used the term loaded to represent having the maximum permitted number of Units for a given risk level. Thus, “loaded in yen” meant having the maximum 4 units of Japanese Yen contracts. Completely loaded meant having 12 Units. Etc."
-Adrian
