etc., we'll just talk about plain vanilla stocks.
>If Dennis made so much money, why didn't he keep the system a secret?
>So what is this system?
- Each day we calculate
**TR**: the**T**rue**R**ange. (See**ATR**) That's the maximum value of:- (today's High) - (today's Low)
- | (today's High) - (yesterday's Close) |
- | (today's Low) - (yesterday's Close) |
- Then we calculate the 20-day
**E**xponential**M**oving**A**verage of the**TR**. (See**EMA**) We use the following prescription, calling the result**N**: (If it were an ordinary, garden variety moving average rather than an__exponential__moving average, it might also be called Average True Range.)**N**(today) =(19/20)**N**(yesterday) + (1/20)**TR**(today) Note that we need 20 days worth of data in order to begin our calculations.
Yes, but I'm just regurgitating the explanation given in the PDF file ... so don't worry about it. >Why an exponential average ... and why some True Range thing?
> - Suppose that a 1 point change in the asset generates a change of $
**D**in the contract. (**D**is Dollars per Point.)**Dollar Volatility**=**N****D**
Yeah, that confused me, too. In the Turtle System, practised by Richard Dennis (and his students), they were trading in futures. For example, one futures contract for heating oil represents 42,000 gallons. (That's 1000 barrels.)
Then, for heating oil, a $1 change in the price of heating oil would change the price of the contract by $ D = $42,000.
Okay, now suppose you have $1M to invest. How much should you invest in the asset with a given That is, you build your position in the asset in "Units". Each unit is 1% of your equity for each unit of Dollar Volatility.
In other words, each Unit is: Unit = (1% of Portfolio Equity) / (Dollar Volatility)>That's confusing!
still confusing! Can't you ...?
Provide an example? Okay, here's an example: [1]
- Suppose you have $1,000,000 to invest in heating oil futures.
- Assume the
**Average True Range**of heating oil contracts (that's the 20-day EMA of the True Range) is**N**= 0.015. - A $1 point change in the price of oil would generate a change in value of the contract of $
**D**= $42,000. - The
**Dollar Volatility**for heating oil contracts is then:**N****D**= (0.015)(42,000) = 630. - That makes the size of each trading unit:
**Unit**= (0.01)(1,000,000)/630 = 15.9. - Rounding, you might buy 16 contracts.
You can trade 2 units or 3, but (according to the Turtle Rules) never more than 4. Of course, it's assumed that you have several investments, not just GE. Here are some other examples:
>Where's the spreadsheet.
- We started with the True Range of prices per share (or per futures contract). That's measured in
**Dollars per Share**. - We averaged these Dollars per Share over the last 20 days. We got
**N**, which is also measured in**Dollars per Share**. If**N**= 1.25, it means the maximimum daily variation in prices, averaged over 20 days, is $1.25 per share. - Then we introduce $
**D**, the so-called "dollars per point". For our stocks, that'd be measured in**Dollars per Share**. - Hence the
**Dollar Volatility**=**N****D**is measured in (gulp!) (Dollars / Share)^{2}. - Hence our
**Unit**= (1% of Dollars) / (**Dollar Volatility**) is measured in (Dollars)/(Dollars / Share)^{2}.
That's what I said! It seems to me that, at least for trading stock shares, the denominator in the Unit ratio should be measured in (Dollars / Share).
Then the Unit ratio would be measured in Shares.
To do this, we'd want N to be a percentage ... like, maybe, (20-day average True Range of prices per share) divided by the (Price per Share).
Then the Unit ratio would be (Dollars) / (Dollars / Share) ... or Shares.
>Sounds good to me.
>I think you're confused.
Okay, here's my spreadsheet ... so far. Click on the picture to download the speadsheet. Following the "typical" Turtle System, we take the m-day EMA using the magic formula:
>Is that 57.55 shares ... or what?
I think it's reasonable to modify the above spreadsheet so that I calculate the 20-day >APR?
- Each day you calculate the largest of the following numbers:
- [ (today's High)- (today's Low) ] / (yesterday's Close)
- | (today's High) / (yesterday's Close) - 1 |
- | (today's Low) / (yesterday's Close) - 1|
- Called these numbers
**Percentage Ranges**(or**PR**). - You then average these "Percentage Ranges" over the past m days, calling it the
**Average Percentage Range**(or**APR**).
APR is a percentage (it's some price range divided by yesterday's price), then our Unit will be measured in Shares.
Then we're happy. > We are happy? You mean are happy!
youYes. In fact, you now have a choice in the spreadsheet. In fact, you got one of these: >Does that make a difference?
>And
Click to continue to Part II. > |