Position sizing is one of the most important but least understood components

of any trading system.

The Turtles used a position sizing algorithm that was very advanced for its day,

because it normalized the dollar volatility of a position by adjusting the position size

based on the dollar volatility of the market. This meant that a given position would

tend to move up or down in a given day about the same amount in dollar terms (when

compared to positions in other markets), irrespective of the underlying volatility of the

particular market.

This is true because positions in markets that moved up and down a large amount per

contract would have an offsetting smaller number of contracts than positions in

markets that had lower volatility.

This volatility normalization is very important because it means that different trades in

different markets tend to have the same chance for a particular dollar loss or a

particular dollar gain. This increased the effectiveness of the diversification of trading

across many markets.

Even if the volatility of a given market was lower, any significant trend would result in

a sizeable win because the Turtles would have held more contracts of that lower

volatility commodity.

**Volatility – The Meaning of N**

The Turtles used a concept that Richard Dennis and Bill Eckhardt called N to

represent the underlying volatility of a particular market.

N is simply the 20-day exponential moving average of the True Range, which is now

more commonly known as the ATR. Conceptually, N represents the average range in

price movement that a particular market makes in a single day, accounting for opening

gaps. N was measured in the same points as the underlying contract.

To compute the daily true range:

True Range = Maximum(H-L,H- PDC,PDC – L)

where:

H – Current High

L – Current Low

PDC – Previous Day’s CloseTo compute N use the following formula:

N =(19 x PDN + TR) / 20where:

PDN – Previous Day’s N

TR – Current Day’s True Range

Since this formula requires a previous day’s N value, you must start with a 20-day

simple average of the True Range for the initial calculation.

**Dollar Volatility Adjustment**

The first step in determining the position size was to determine the dollar volatility

represented by the underlying market’s price volatility (defined by its N).

This sounds more complicated than it is. It is determined using the simple formula:

Dollar Volatility = N×Dollars per Point