Volatility: The meaning of N

Update from "The Turtle system: Forex performance analysis" by Daniel Fernandez (January 2010).

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. To compute N use the following formula:


Since this formula requires a previous day’s N value, you must start with a 20-day simple moving average of the true range for the initial calculation.

Dollar volatility adjustment
The first step in determining the position 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:


Volatility adjusted position units
The Turtles built positions in pieces called Units, which were sizes so that 1 N represented 1 percent of the account equity. Thus, a unit for a given market or commodity can be calculated using the following formula:


Example
Heating oil futures (HO)
N = 0.0141
Account size = $1,000,000
Dollars per point = 42,000 (42,000 gallon contracts with price quoted in dollars)
Unit Size =  (0.01*1,000,000)/(0.0141*42,000) = 16.88

Since it isn’t possible to trade partial contracts, this would be truncated to an even 16 contracts.

From “The Original Turtle Trading Rules” (2003, OriginalTurtles.org)




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