Turtle Trading Explained

One popular trading style that keeps on coming back from the dead with the regularity of the baddie in a horror flick is 'Turtle Trading'. A swing trading style, the Turtle Trading system was devised by legendary trader Richard Dennis in order to show that great traders weren't born, they could be 'grown', just like turtles in a Far East Turtle farm.

There are many websites offering courses in how to turtle trade, sometimes for thousands of dollars, some of them even run by people who are allegedly 'ex-turtles'. This is frankly hilarious - the entire turtle system is available for free as a PDF download from www.originalTurtles.org and we here at www.traders101.com STRONGLY advise you to grab it and read it before you lash out any cash on a 'course'. As far as we know, there is NOTHING to be learned from these expensive 'courses' that you can't find for free in the excellent download, written by real Turtle traders who were trained by the great man himself.

In order to help you decide whether turtle trading is for you, here's a quick overview. First off, in 1983 when Dennis tried the scheme, it worked. It worked BIG TIME in fact, producing an AVERAGE 80% compounded over the four years of the trial. The turtle trading rules themselves were simple - the secret was the ability to STICK TO THE RULES!. This made it a mechanical trading system par excellence, and a good mechanical trading system, as you should know, is the key to consistency.

The turtle trading rules specified in detail what markets to trade, how to size a position properly, when to enter and exit, how to use stops to exit a losing position, how to exit a winning position, and some ancillary tactics on the buying and selling of large positions without alerting the market.

What to trade. The turtles traded futures (commodities, as they were known at the time). They traded all liquid futures markets except grains and meats. That included T Bonds, coffee, sugar, cotton, currencies, precious metals and oils. An individual trader could decide what he wanted to trade.

Position Sizing. The turtles liked to normalize their positions based on the underlying dollar volatility of the market - a common trick nowadays, but advanced for the 80s. This made the effective risk across markets similar, and allowed them to trade many markets in a similar way. Key to this is 'N' - the underlying volatility of a market. To calculate N, find the 20 day exponential MA of the ATR (true range). There's a lot on Moving Averages over at www.traders101.com if you need a refresher. Having found N, the 'Dollar Volatility' is N x Dollars Per point. The S&P, for example, moves 50 bucks a point on the emini contract.

To create a turtle trading 'unit', you work out 1% of your equity, and divide by the dollar volatility. As you might have guessed, its a low risk strategy, as you need to be able to withstand extended drawdown periods to 'stay in the game'. The 'unit' tells you how many contracts to trade, and still stay relatively safe. To further de-risk the system, each market had limits. No more than 4 units could be traded in a single market, for example.

After losing trades, turtles would reduce the effective equity, in order to scale back risk even further. Expand when you are winning, pull back when you are losing. But how did they know when to trade???

Entries. There were 2 breakout systems used by the turtles. The first used a 20 day breakout. The second used a 55 day breakout. A 20 day breakout is where the high or low exceeds the high or low of the preceding 20 days. They took the trade when it was offered - i.e. this was not an 'end of day' system. If an opening gap caused the breakout, the turtles would still take the trade, as the idea was they would be in it for some days, and a couple of points at the start didn't matter. Personally, (and everyone at www.traders101.com agrees!) we never chase the gap. Obviously, the turtles traded both long and short. There were a couple of extra rules, such as ignoring a signal if the LAST breakout (whether the turtle took it or not) would have led to a winner. The 55 day breakout would then become the initiation point as a fail-safe on major moves. Full rules, are of course, available in the free download.

Stops. Turtle traders ALWAYS used stops. They defined the exit point BEFORE initiating a trade. Their positions could be so large that in order NOT to alert the market, 'mental' stops were used. No trade could carry more than 2% risk. This means a stop would be 2 x N away from the position.

Exits. Most breakouts do NOT result in trends. Most turtle trades, therefore, ended in losses. The winners therefore had to be BIG to cover the losers, and they were. The first exit rule was to exit on a 10 day low or high against your position. The second method was an exit against a 20 day high or low. Simple, yes. But at the time it worked. The HARD part for most traders is hanging on grimly as profits evaporate over 10 or 20 days! The cultivation of THAT discipline was the real secret!

Does it still work? Sometimes. The market is well aware of the legions of would-be turtles avidly watching for 20 day breakouts. 'Turtle Soup' is a common maneuver whereby a big player 'fakes' a move up or down to trigger the turtle signals, then reverses it, stopping them out. Mean, ain't it? Bottom line, if you want to turtle trade, you need to adapt the rules for your own personal style and hide your 'footprint' in the market.


About the Author

Trader Jack writes stock trading artices for www.traders101.com the free site helping traders get into profit fast