Howard was correct. The sizing in shares would only relate to the ATR (remember N is the same concept as ATR). So with a 1% for N sizing you'd have:Menelik wrote:Let’s try your example, to see if what you say is true.
Percent Account for N = 1%
Entry Breakout = 55
Exit Breakout = 20
Stop in N = 2.0
100,000 portfolio. 1% risk, or $1000.
A) $25tradable. $2.48atr N = 2.0
B) $82tradable. $4.80atr N = 8.0
$25 stock. @ 2.48atr = $5 stop. 200 shares to risk or $1000.
$82 stock @ 4.80atr =$38 stop. 26 shares to risk or $1000
A) N factor of .10
B) N factor of .06
(A) is thus riskier than (B)!
$1,000 / $2.48 = 403 shares of Stock A, NOT 200
$1,000 / $4.80 = 208 shares of Stock B, NOT 26
So you'll have:
$25 X 403 = $10,075 invested in Stock A
$82 X 208 = $17,056 invested in Stock B
You can't literally have:
$2.48atr N = 2.0 - If ATR is $2.48 then N is $2.48, they are the same.
$4.80atr N = 8.0 - If ATR is $4.80 then N is $4.80, they are also the same.
Note: The Turtle System would not have used different sized stops for different stocks, they would have used the same stop across all the stocks. The example Howard gave was a 2N stop, so the stop for both would be 2N or 2 ATR. Your example with a 2N stop for Stock A will represent about 2% of the account. An 8N stop for Stock B will represent about 8% of the account
What the Turtle System does is use N (or ATR) as a proxy for volatility and risk. Positions are then sized to equalize that risk across each position for every market. One could argue that ATR is not a good measure to use to represent risk, that other measures better represent risk. While that may be true, it does not mean that the Turtle System was not a valid and serious attempt to equalize risk across markets.
N also works reasonably well as a way of sizing the stop. As you have pointed out, a low priced stock with relatively high ATR to price ratio is relatively more volatile. Using ATR-based stops would tend to account for this increased volatility and allow larger stops for the stock than a pure percentage based stop.
There are certainly other ways to account for the volatility, and other ways to account for risk. However, the Turtle approach was very advanced considering we are talking about an approach that was devised more than 20 years ago.