Turtle Traders?

[rwk]

I tend to agree with Cutten about risk management. As I recall, Richard Dennis had big equity swings and even blew out a public fund in the late 1980's. I read an interview with him later in which he said that he didn't want to manage public money anymore. I think that was because so few investors can tolerate big equity swings.

A lot depends on what we are trading and whose money it is. With long-term trend following in futures, big equity swings are inevitable. If we cut our losses and let our winners run, we tend to be wrong a lot and it becomes all the more important not to miss the big wins. The Turtles' had an advantage in that they were supplied with funds and not required to make money, only to follow the rules.

 

[inflector]

IMO treating open trade profits as "the market's money" simply means that your risk tolerance fluctuates massively according to the distribution of open vs closed positions in your portfolio. From an economic & utility point of view, open profits are identical to closed profits.

It's basically an excuse to, fairly arbitrarily, massively increase your risk tolerance in the market. Someone who is risking 60-70% of their portfolio on drawdowns is clearly going to make much more during good times than someone who risks 20%. But they are going to be exponentially more likely to blow up (e.g. during an Oct 87 style gap move), lose investors etc. Gap moves happen, and during crashes or market shocks, market correlation increases massively.

IMHO, the risky thing is not doing what the man with the money wants. For Richard Dennis, what mattered was closed trade drawdowns and since he had the money, I listened to what he wanted.

Clearly, for most investors, what matters is the drawdown on total equity. So, I would never use Richard's approach when trading money for typical investors.

For my own trading and testing, I use Total Equity rather than the "turtle approach" of differentiating between open and closed equity.

I don't think that one necessarily opens oneself to greater risk to price shocks, however. This relates only to the size of the positions in absolute terms and not to "risk" if one defines risk only as the money value of the distance between the market high and one's stop price.

For example, it matters not from a price shock perspective, if I have 1,000 contracts of Silver at 15.00 with a trailing stop at 13.50 for a nice 10% risk, or if I have 1,000 contracts with a stop at 9.00 for 40% risk. I'm still setting myself up for the same loss on an 87-style gap.

- Curtis