The Turtle Trading Strategy: What Is It and How to Use It?

The Turtle Trading Strategy: What Is It and How to Use It?

The Turtle Trading Strategy is a famous trend-following system that was developed in the 1980s by legendary traders Richard Dennis and William Eckhardt. The strategy was designed to demonstrate that anyone, even without prior trading experience, could learn to trade successfully by following a set of rules and principles.

The name “Turtle Trading” comes from Dennis’s challenge to a group of individuals (whom he referred to as “turtles”) to follow a systematic set of rules to see if they could become profitable traders. The strategy is based on the idea that systematic, rule-based trading can lead to long-term profits, especially when trends are identified and captured.

Key Principles of the Turtle Trading Strategy

1. Trend Following: The core of the Turtle Trading strategy is to capture long-term trends in the market. The idea is to identify a market that is trending and ride that trend for as long as possible.
2. Breakouts: The strategy uses breakout points, where the price breaks above or below a predefined level, to signal entry. This is based on the idea that once the market breaks a certain level, it will continue in that direction for some time.
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4. Risk Management: Risk management is a crucial component. Turtles used a fixed percentage of their account size to determine position size, ensuring they didn’t risk too much on any one trade.

How the Turtle Trading Strategy Works

The Turtle Trading system consists of a series of rules regarding entry, position sizing, stop losses, and exits.

1. Entry Rules:

• Breakout Entries: Turtles entered trades when the price broke through a 20-day high (short-term breakout) or a 55-day high (long-term breakout). This indicated a strong trend and suggested that the market might continue in that direction.
• Stop Orders: A buy stop order was placed just above the high (for long trades) or below the low (for short trades) of the previous day. If the market reached that price, the order was triggered, and the trader entered the position.

2. Exit Rules:

• Profit Target (Exit): For long positions, Turtles would exit when the price hit the 20-day low. For short positions, the exit would be when the price hit the 20-day high. This method allowed them to capture large moves while avoiding the risk of giving up too much profit.
• Trailing Stops: As the market moved in favor of the trade, Turtles adjusted their stop loss levels to protect gains and allow for further price movement.

3. Position Sizing and Risk Management:

• The Turtle Traders used a fixed position-sizing formula based on market volatility. They risked a fixed dollar amount on each trade (1% of their capital). This was determined using the Average True Range (ATR) to gauge market volatility.
• The formula for position size is: Position Size=Dollar RiskVolatility (ATR)\text{Position Size} = \frac{\text{Dollar Risk}}{\text{Volatility (ATR)}}Position Size=Volatility (ATR)Dollar Risk​ This helped the traders adjust their positions according to the volatility of the asset they were trading.

4. Risk per Trade:

• The Turtles risked no more than 2% of their capital on any single trade. They diversified their trades across multiple assets to reduce the risk of a catastrophic loss.

5. Trade Duration:

• The Turtle strategy had no specific timeframe for how long to hold a position. A position was held for as long as the trend continued, and the exit occurred once the market showed signs of reversal.

Steps to Implement the Turtle Trading Strategy

1. Identify Breakouts:

• Use a charting tool to track the 20-day and 55-day high/low points.
• When the price breaks above the 20-day high (for long trades) or below the 20-day low (for short trades), this signals a potential breakout.

2. Enter the Trade:

• Place a buy stop order above the 20-day high for long trades, or a sell stop order below the 20-day low for short trades.
• If the market moves past these points, the position is entered automatically.

3. Set Stop-Loss and Take-Profit Levels:

• Use a stop-loss just below the breakout point (for long trades) or just above it (for short trades). This protects your capital in case the breakout fails.
• Exit the position if the price hits the 20-day low (for long trades) or 20-day high (for short trades).

4. Adjust for Volatility:

• Use the ATR to determine your position size and adjust for the volatility of the asset you’re trading. The greater the volatility, the smaller your position size, and vice versa.

5. Risk Management:

• Always limit the amount of capital you’re risking on each trade to 1-2% of your account balance.
• Use trailing stops as the price moves in your favor to lock in profits.

Pros and Cons of the Turtle Trading Strategy

Pros:

• Clear and Systematic Rules: The strategy is very rule-based, which removes emotions from trading.
• Captures Large Trends: By focusing on breakouts and trend-following, the strategy has the potential to capture large, profitable market movements.
• Risk Management: The use of stop losses and position sizing based on volatility ensures that risk is carefully managed.

Cons:

• Not Suitable for Choppy Markets: The strategy works best in trending markets. In sideways or choppy markets, breakouts may fail, leading to whipsaws and losses.
• Requires Patience: Since the strategy relies on long-term trends, it may take time to show significant profits.
• Emotionally Challenging: Holding positions through large price fluctuations can be stressful, especially when the market temporarily moves against the trader.

Conclusion

The Turtle Trading Strategy is a robust and systematic approach to trading that focuses on capturing trends using breakout signals, sound risk management, and position sizing. While it’s not suited for all market conditions, especially sideways markets, it can be highly profitable in trending environments. For beginners, adopting the principles of the Turtle Trading strategy, such as strict risk management and systematic entry/exit rules, can help create a disciplined and structured trading approach.

The Turtle Trading Strategy is a trend-following system that was developed by Richard Dennis and William Eckhardt in the early 1980s. The idea behind this strategy is that one can teach people to trade successfully by following a set of rules, similar to how one might train turtles – hence the name. Here’s an overview of what the Turtle Trading Strategy entails and how to use it:

Core Principles of the Turtle Trading Strategy:
Trend Following: The strategy is fundamentally about catching and riding trends. The basic premise is that markets move in trends, and these can be capitalized upon with disciplined trading.
Systematic Approach: All decisions are based on explicit rules rather than intuition or market sentiment, aiming to remove emotional decision-making from trading.

Key Components:
1. Markets to Trade
Turtles traded various markets including commodities, currencies, and financial instruments where a trend could be identified.

2. Entry Signals
Breakout System:
System 1: Uses a 20-day breakout. If the price exceeds the high (for long trades) or low (for short trades) of the last 20 days, a position is entered.
System 2: Uses a 55-day breakout, looking for a price move beyond the high or low of the past 55 days for entry.

3. Position Sizing
Volatility-Based Sizing: The Turtle traders used the Average True Range (ATR) to determine the volatility of the market, adjusting their position size based on this. This was called the N, where N = True Range of the last 20 days.
The position size is calculated by the formula:
Units
=
Account Equity
∗
Percentage Risk
Entry Price
∗
N
Where Percentage Risk is typically 2% for System 1 and 0.5% for System 2.

4. Exit Strategy
10 Day Exit: Exit a position if the price reaches the highest high or lowest low of the last 10 days, depending on whether you’re in a long or short position.
20 Day Exit: Similar to the 10-day exit but uses the 20-day high or low.
Stop Loss: Initially, stop losses were set at 2N below the entry for long positions or above for short positions, but this was adjusted as the trade moved in favor.

5. Pyramiding
The strategy allows for adding to a winning position, essentially “pyramiding” up. New units are added when the market moves in the trader’s favor by 0.5N.

How to Use the Turtle Trading Strategy:
Select Your Market: Choose markets that show liquidity and trendiness. Futures were the original market of choice for turtles, but this can be adapted to stocks, forex, etc.
Calculate N: Compute the Average True Range (ATR) over the last 20 trading days to determine the market’s volatility.
Identify Breakouts:
For System 1, enter long if today’s high exceeds the highest high of the last 20 days.
For System 2, use the 55-day high or low for entry.
Size Your Position: Use the formula above to determine how many units to trade, based on your account size and the volatility (N).
Set Stops and Exits:
Place initial stop losses at 2N from your entry point.
Use the 10-day or 20-day highs/lows for exiting winning trades.
Manage Your Trades:
Add to your position with every 0.5N move in your favor (pyramiding).
Remember to take profits or cut losses according to your exit rules.
Discipline: Stick strictly to the rules, avoiding emotional trading.