Turtle trading rules were formulated in 1983 by commodities traders Richard Dennis and Bill Eckhardt. They were having opposite thoughts about a successful trader. As Richard Dennis believed anyone can become a successful trader, a novice can be trained. If they follow the rules with discipline any person can become a profitable trader. On the other hand, Bill Eckhardt believed that great traders were born not made. Bill thought a person was born with exceptional skills and these people become millionaire traders. To settle the dispute Richard came up with a suggestion to recruit and train freshers and ascertain the possibility.
So, they placed an advertisement and received applicants from aspirants to be trained by the world-famous traders. Richard selected and trained 13 candidates for two weeks. The new students were called Turtles. After the completion of the training, he gave small trading accounts to the Turtles and asked them to trade. Based on the trading performance of the Turtles Richard funded the trading accounts ranging from $500,000 to $ 2,000,000 of his own money. The Turtles, the newbie’s went ahead and made huge fortunes to become very successful traders. In the process, a few unsuccessful Turtles left while the rest of them proved Richard was right in this thought. As a result, this huge experiment watched by everyone on Wall Street became a massive success.
Turtle trading is a rules-based complete mechanical trading strategy. A mechanical trading strategy provided trading consistency if the rules were followed strictly. Since the trading was mechanical it avoided the trading-related emotions, which formed an important factor in the failure of trading systems. So every Turtle was required to follow the trading rules strictly and not to deviate in any way.
Turtle trading contains a set of rules for each of the following trading components.
- Markets – Which markets are best suitable for the Turtle trading strategy?
As the Turtle trading strategy was a trend-following strategy, it required markets with high liquidity and trading volume. The strategy required to follow multiple markets simultaneously to identify the trend. The trend was the important factor in the strategy, in the absence of a trend there was not trading and the Turtles were on the sidelines.
- Position Sizing – How much to risk in Buying or Selling in one single trade?One often overlooked component of a trading strategy is position sizing. In fact, position sizing is the single common mistake found in unsuccessful traders and is equally found with new and experienced traders. However, it is important to diversify the trades by placing positions in multiple trading instruments to reduce the riskconsiderably.
- Entry – When to open a BUY or SELL position?The entry of any position is of paramount importance and is triggered once the set rules are met. Since the strategy uses mechanical rules it can be automated.
- Stop Loss- The rules for stop loss.Cut your losses before they eat your trading account. Holding a few losing positions for a longer period eventually erases the gains of other trades and eventually leads to disaster.
- Exit – The definite rules to exit a position.Exiting a winning trade is an art, many traders either book profits too quickly or watch their profits evaporate. The balance between a quick exit and being in the market to ride the trend provides the best trading returns.
- Tactics – Additional rules to be followed while using the trading system, like scaling up positions.
Content
- The Original Turtle Trading Rules
- Do The Turtle Trading Rule Still Work
- Trading Psychology and Money Management
- Turtle Trading Rules For Trading Other Instruments
- Turtle Trading System Backtest
- Turtle Trading Software
- Turtle Trading Strategy Book
- Conclusion
The Original Turtle Trading Rules
The Turtle trading rules were used to trade in the following markets.
NYME – New York Mercantile Exchange
- Unleaded Gas
- Crude Oil
- Heating Oil
COMEX
- Gold
- Copper
- Silver
Chicago Mercantile Exchange
- Japanese Yen
- British Pound
- Swiss Franc
- British Pound
- French Franc
- EuroDollar
- Canadian Dollar
- S&P 500 Index
- 90 Day U.S Treasury Bill
- Deutschmark
New York Coffee Cocoa and Sugar Exchange
- Cotton
- Sugar
- Cocoa
- Coffee
Chicago Board of Trade
- 30 Year U.S Treasury bond.
- 10-year U.S Treasury note.There are two systems based on the entry criteria.
- 20-day breakout-based short-term strategy.
- 55-day breakout-based long-term strategy.
As discussed earlier the original turtle trading rules are as follows
Turtle trading rules –Buying Short term Strategy
- Entry: BUY when the price exceeded the High of the previous 20 days.
- Stop Loss: 2 ATR from entry.
- Trailing Stop Loss: Exit if the price went below 10 Day low.
- Risk per trade: 2% of the account equity.
Turtle trading rules – Selling Short term Strategy
- Entry: SELL when the price dropped below the LOW of the previous 20 days.
- Stop Loss: 2 ATR from entry.
- Trailing Stop Loss: Exit if the price went above the 10 Day High.
- Risk per trade: 2% of the account equity.
Turtle trading rules – Buying Long term Strategy
- Entry: BUY when the price exceeded the High of the previous 55 days.
- Stop Loss: 2 ATR from entry.
- Trailing Stop Loss: Exit if the price went below 20 Day low.
- Risk per trade: 2% of the account equity.
Turtle trading rules – Selling Short term Strategy
- Entry: SELL when the price dropped below the LOW of the previous 55 days.
- Stop Loss: 2 ATR from entry.
- Trailing Stop Loss: Exit if the price went above 20 Day High.
- Risk per trade: 2% of the account equity.
The success of the Turtle trading system is due to the consistency of the trading system. So every possible entry signal should be traded with no regard to the profits or losses of the previous positions. Like every trend-following strategy, the trading system encounters many false starts of the trend. Because every breakout does not transfer into a successful trend, there will be many false starts and will result in multiple continuous losses. As a result, the account will experience a huge drawdown. But, there will be some good trades that will run for a longer period and will ride the trend. These trading positions produce profits massive enough to cover the losses and eventually exceed the losses and turn the account into a profitable one. So it is very important that Turtle traders trade will resiliency and stick to the rules consistently.
Also read: Gartley Pattern
Do The Turtle Trading Rule Still Work?
Yes, turtle trading still works, because it is a trend following strategy and trend following works in all major liquid markets. The heart of the Turtle is to use breakouts to identify the beginning of a trend and the same time, find the best place to exit the trend. These characteristics are the core of a multitude of automated trend-following trading systems and manual strategies. However, traders have modified the rules using their technical indicators for trend identification.
It is true, the trading conditions have changed and the market landscape is different from the conditions in 1983. But there are many trading instruments other than those used in the original Turtle trading system which is still volatile and trending. So, traders can choose alternate trading instruments and trade with them. A similar approach can be applied to identify the entry using breakout.
Every trading instrument has its characteristics and differs widely from each
other. Every market place or exchanges have their trading characteristics and
are changing, so traders should identify them and apply a different set of
entry and exit rules. For example, instead of using the 20 days high or low
breakout in a short-term strategy, traders can use a 50 day high or low.
Market and commodity prices in particular have changed the nature of the trend due to the market demand and an ever-changing demand and supply dynamics. So traders should research to identify the best entry and exit parameter while keeping the core or heart of the Original Turtle Trading Rules. Ideally, every successful trader will continuously work on input parameters of the trading strategy and adapt to the ever-changing market landscape.
Also read: Bat Pattern
Trading Psychology and Money Management
Trading Psychology is a very important aspect of trading. Every trader is unique and will have an approach towards the markets that are dictated by the individual’s mindset and previous trading experiences. So every trader should prepare themselves to go through the emotions while holding a losing position, or watching a winning position turning to loss. Many circumstances test the mental strength of a trader. Every trader needs to identify the weaknesses and turn them into strengths.
Money management is another feature of Turtle trading that is useful in planning the trading volumes for initial entries and to build additional position sizes. This often-overlooked feature is addressed in the Turtle Trading Rules and has defined rules for position sizing using different volatility conditions.
Turtle Trading Rules For Trading Other Instruments
There is a long-term ongoing discussion regarding the trading instruments used by the original Turtles. The Original Turtles used exchanges and commodities which were traded mostly in terms of the trading volume. So, it is necessary to choose a trading instrument with the same features. In the current market conditions, traders can look for trading instruments in stocks, forex, and futures markets and trade them effectively using the Turtle trading rules, because these markets have ample liquidity and provide decent trading volumes. The ATR of these instruments can be measured and the historical trading data is readily available for calculation using the software.
Turtle Trading System Backtest
Backtesting is the best method to test any trading strategy. Backtesting can be automated using much software available for free or through specialized software for this purpose. Since Turtle trading rules are mechanical, backtesting them is very easy and can be done with little effect. Most marketplaces provide historical data and are available free. Moreover, backtesting may reveal hidden flaws in the trading strategy and the input conditions. On the other hand, backtesting and optimization of the input parameters for the long run can provide the trader with a complete snapshot of the performance. Essentially, backtesting will assist the trader in identifying and unearthing the performance of any trading instrument using the Turtle trading rules.
Also read: Bull Trap
Turtle Trading Software
There are much software that can be used to code the Turtle trading rules using Turtle trading strategy Python and other coding languages can automate the system. Turtle trading rules excel sheets can be used to monitor the performance using manual entry and exit points. Turtle trading system indicators can also be developed and coded easily. In fact, there are many indicators, scripts, and experts available in the market to trade using the Turtle rules. All of them take advantage of the mechanical trading rules.
Turtle Trading Strategy Book
Many books are available in print and soft copies from many Turtles with the trading rules and strategies. A few Turtles teach the strategy and also have modified the original trading rules to accommodate the modern days trading conditions and volumes, The Turtle trading rules pdf has short descriptions and also detailed illustrations. Like any trading system, every trader should spend considerable time understanding the basic rules and the criteria before applying them in their trading accounts. There is no substitute for understanding a mechanical rule-based system, by manually trading it.
Conclusion
The Turtle Trading Rules is indeed a mechanical rule-based system, which many people fail to follow. Many traders fail to follow the rules and break the rules repeatedly due to the intermittent losses and the drawdown the system produces. The basic issue with this problem is due to a lack of confidence in the trading system, this can be overcome only by repeatedly testing the strategy by trading manually or backtesting it using automated software. Furthermore, traders tend to use and apply a trading system as it is without doing enough research and understanding the core ideas. The Turtle trading system if applied properly after doing the necessary research to select trading instruments will produce beneficial results.
