How is ATR multiple calculated in Trend “Turtle” Trading?

Question

I have been reading a few books about trend trading and the famed "Turtle" strategy. One concept that is evading me is how the ATR multiple for risk is calculated. I think I understand how to make the calculation after you have the multiple and how this gives you 'leverage'. If the ATR multiple is 7.5 then you divide the multiple by your risk percentage (e.g. 2% of account/7.5) and buy the resulting number of shares - correct?

But how is the multiple even calculated? I read that the "Turtles" only used a multiple of 2x. But other books I've read seem to use arbitrary numbers like 2.5, 4.5, 7.5. How is this calculated?

The Turtle risk management dictated their stops, their additions to positions, and their equalization of risk across their portfolios. For example, a corn futures contract (a standard corn contract is worth $50 per cent) with an “N” of 7 cents has a risk of $350 (7 cents X $50). If the Turtles received a corn breakout signal (using a 2N stop), they would have had a “contract risk” of $350 X 2, or $700.

Covel, Michael W. (2009-10-13). The Complete TurtleTrader (p. 83). HarperCollins. Kindle Edition.

I don't fully understand this explanation either. Who calculates the N of 7 cents? How was that number decided over a multiple of 2?

Answer 1

Average True Range (ATR) is the average of the price range over a selected period of time. I usually use the ATR over the last 14 periods.

There are a few different ways to use ATR but one of the main uses I have learnt is to set your trailing stop loss levels with. If the average range over the last 14 days is say $0.20, then you don't want to set your trailing stop at 1 x ATR, because you would be stopped out on an average ranging day, which you don't want. In other words you want to avoid beings stopped out due to average daily noise.

If you placed your stop at 2 x ATR, all you need is a bit of a wider ranging day and you will be stopped out. So most traders would use 3 x ATR or 4 x ATR, to reduce the chance of being stopped out by daily noise and increasing the chances of being stopped out only when there is a change in trend.

If you are using a stop at 4 x ATR, being $0.80 and have an account of $10,000 for which you are risking 2% ($200) per trade, then you can determine you position size for the trade by dividing $200 by $0.80 to get 250 units you can buy for this trade.