The turtle trading strategy introduces renowned trading tactics developed by Richard Dennis during the 1980s. The main idea is to let traders benefit from sustained momentum. The main advantage here is the ability to adjust turtle trading to different types of financial markets and use it when trading various instruments.
The concept is aimed at identifying upside and downside breakouts. The strategy founder wanted to develop a mechanism that would make it possible for traders to use specific rules instead of relying on their feelings and emotions. Dennis launched an experiment and invited a group of people to trade following those rules. If someone succeeded, he or she would get $1 million. This is how the story of the turtle trading system began.
What does Turtle trading strategy mean?
As you have already understood from the introduction paragraph, turtle trading refers to the type of trend following strategy. The original tactics included a 20-day high breakout futures purchase and 20-day low selling. Of course, the concept involves more rules to consider in addition to specific details that will shape the strategy depending on the market conditions.
Original Turtle trading rules
To make the most of the turtle trading strategy, you need to be well aware of its baseline rules. There are six major points that traders should take into account when establishing a successful trend following technique:
1. Market Types
The first thing is to identify the type of the traded market. Turtle trading works with high volatility markets. It means that it may help when trading:
- S&P 500;
- Forex and bonds.
2. Position Sizing
Position sizing is the core algorithm for the turtle trading strategy. The idea is to make sure that all positions are of the same size despite the type of traded markets. Besides, it helps to improve diversification. High liquid markets let traders spot fewer contracts and vice versa. The system uses different ways to evaluate the volatility and uses a 2-day exponential moving average.
3. Market Entry
As we consider two different breakouts (upside and downside), traders may use two different market entry tactics. To make things as simple as possible, traders opt for a 20-day breakout no matter if it is high or low. What's more, turtles are supposed to use all the signals. If at least one was missed, it would result in missing a potentially big trade and win. Would it not only drag down total return but also ruin the trading algorithm with a 55-day breakout and winning positions with up to 4 market entries.
4. Stop Loss
Dennis taught turtles to place as many stop losses as possible. That was the only way to prevent bigger failures. The key idea here is to evaluate the risk before entering the market or placing a trade. The higher volatility the market has, the wider stop losses traders are supposed to set.
5. Market Exit
It requires maximum skills to define the best moment to close the trade. Leaving too soon will limit your chances to win the big trade. Many trend followers make this common mistake. The turtle trading strategy involves many trades with smaller wins. On the one hand, it can mean smaller losses. On the other hand, it has a 10-day exit rule in case of a breakout downside for long positions. So, the idea is to look for the real-time price instead of using top exit orders.
6. Trading Tactics
The turtle-trading founder taught students to use additional tactics like setting limit orders or dealing with different types of markets that generally move very fast. Dennis explained how important it was to wait with patience before it was time to place an order. Once again, turtle trading is about discipline as well as the ability to spot the strongest (for purchase) and weakest (for selling) markets.
Reasons to use Turtle trading system
First, turtle trading rules and the experiment itself provide traders with tons of useful details and information based on other traders' experience. Secondly, it explains the core issues of trading psychology. For example, some traders failed to follow the rules because of being impatient or lacking discipline. One would hardly argue that people find it very difficult to follow the rules even if they promise big trades.
Last but not least, turtle trading is a set of tested rules. You do not need to invent the wheel although some small modifications may be necessary to customize the strategy following current market conditions and trends. Finally, the idea is always the same – the concept is about preventing losses, delivering a high risk-reward ratio, and closing big trades with benefits.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.