【Capital Management】Concept of a Unit
A question for you who are trading.
“How much risk are you taking right now?”
Would you be able to answer that?
Most people probably can’t.
Perhaps you’re buying stocks or trading USD/JPY without a clear plan.
In this article, we will introduce a way of thinking that lets you trade all financial instruments—stocks, FX, cryptocurrencies, etc.—with the same mechanism.
There is a concept called “units,” used in capital management by the legendary investor group, the Turtles.
One unit is the amount of trading volume that carries a 1% risk of your investment funds in one day.
How to calculate the unit:
① Let 1% of your investment funds be A
② Calculate the daily risk when trading the minimum lot size of that instrument
ATR × trading unit = B
③ Unit = A ÷ B
ATR stands for the average daily price movement
Previous article ↓
Let’s think through a concrete example.
Suppose your investment funds total 10 million yen.
One day, the USD/JPY ATR was 1.5 yen.
Let’s assume the minimum lot size is 10,000 units.
Then the unit can be calculated as follows.
① 1% of 10,000,000 yen is 100,000 yen
② 1.5 × 10,000 = 15,000
③ 100,000 ÷ 15,000 = 6 (rounded down)
This means one unit of this USD/JPY trade is 6 lots.
Some FX brokers allow trading in 1,000-unit lots as well.
In this case, it would be 60,000 units.
Why use such a calculation? Because by calculating units in the same way for other financial instruments, you can easily grasp how much risk you are taking right now.
Calculate similarly for individual stocks or Nikkei futures, and if you know you hold 1 unit each, you know you are taking 1% risk on each.
However, since trading units and unit names differ by instrument (e.g., 100 shares for a stock, 1 mini contract for Nikkei futures), simply looking at trading volume does not tell you how much risk you are taking.
Therefore, we reverse-calculate risk from the average daily movement using ATR.
Then you don’t end up thinking, “FX is in tens of thousands of units, stocks are in hundreds,” and so on.
For example, if you are trading 1 unit of USD/JPY, 2 units of EUR/USD, and 3 units of Nikkei futures, a total of 6 units means you are taking 6% risk.
Risk is not determined by a multiplier of leverage alone; you should
- determine an appropriate amount per trade
- determine an appropriate total trading amount
This is capital management.
The Turtles defined the appropriate total trading amount with rules like these:
① Up to 4 units for the same instrument
② Up to 6 units for highly correlated instruments
③ Up to 10 units for correlated instruments
④ If buying, up to 12 units for buy positions; if selling, up to 12 units for sell positions
Rule ① is for increasing long or short positions
② and ③ promote diversification and avoid concentration in similarly moving assets
④, including rules ①–③, means up to 12 units for buy positions or up to 12 units for sell positions.
It's a distinctive approach compared to the vague idea of “investing with a fixed percentage of funds to avoid risk.”
Statements like
“Let’s avoid excessive leverage,”“Just diversify as much as possible,”
are often said without understanding their meaning (laugh).
Understanding the Turtle’s unit concept changed my own view of trading.
Previously I was obsessed with timing trades, but by managing funds in unit sizes and using scale-ins and diversification, I learned I could win more consistently.
The unit concept used to calculate daily risk can be applied not only to daily charts but to timeframes as well.It is a concept that applies to all financial instruments, so master it!
Past performance data of ATR-based trading rules is now公開
