Turtle Trading: Definition, Rules, and Strategy

Richard Dennis was a well-known trader who achieved significant financial success in the early 1980s. He started with less than 5,000 and turned it into over 100 million . Wilhelm Eckhardt, Dennis’ partner, thought Dennis’ success was solely due to a unique talent. Dennis objected. Dennis followed a set of guidelines while trading. He believed anyone could become a profitable trader if they learned and adhered to his procedures. This is the turtle trading strategy. Let’s explore what turtle trading is.

Meaning of Turtle Trading

Turtle trading is a well-known trend-following tactic that traders employ to profit from ongoing momentum. It is applied in various financial markets and searches for breakouts on both the upside and downside.

Using a mechanical method that enables traders to adhere to rules rather than relying solely on gut instinct was Dennis’s notion. A group of newbie traders received instruction in following the guidelines before being granted 10,00,000 each if they were successful.

The Turtle Trading Experiment

In contrast to Richard Donchian, who is credited with creating trend trading, Dennis is credited with popularising turtle trading. Donchian developed the method in the 1960s with the following weekly trading rule: ‘Closing your short positions and making a purchase should be done when the price surpasses the high of the previous two calendar weeks (the ideal number of weeks varies for each commodity). Liquidate your long position and trade short if the price drops below the two-week low.’ Dennis refined the turtle trading technique, while Donchian devised a risk-averse trend trading approach.

Six Rules of Turtle Trading

Rule #1: Liquid Markets

The turtles transacted the futures contracts and sought extremely liquid markets to trade without disrupting the market with a sizable transaction. The turtles sold bonds, the S&P 500, metals, energy, foreign exchange, and commodities.

Rule #2: Position-Sizing Program

The turtles used a position-sizing program to size their trades, which normalised the dollar volatility of the position by altering the transaction size depending on the market’s dollar volatility. By guaranteeing that each stake was the same size for every need, this strategy aimed to enhance diversity. Markets with more significant liquidity trade fewer contracts, whereas markets with less liquidity trade more. The technique examined the 20-day exponential moving average of the genuine range to determine a market’s volatility.

Rule #3: Distinct Entries

There were two distinct entrance procedures. The first employed a short 20-day breakout, a high or low for 20 days, or a 55-day breakout. Up to four more entries might be added to the winning places. The turtles were instructed to take all available signals since failing to do so may cause them to miss a large opportunity, reducing their overall returns.

Rule #4: Prevent Losses

The turtles were always instructed to employ stop losses to prevent excessive losses. Importantly, they decided on their stop loss before taking the position, outlining their risk before executing the trade. They avoided suffering significant losses in the same way as renowned trader Nick Leeson, who let his losses get out of hand. Wider stops were used in more turbulent markets to prevent getting whipsawed out of a deal.

Rule #5: Well-Timed Exits

Leaving a position too soon might significantly reduce the potential profit of that transaction. This is an error that trend-following systems frequently make. The turtles acquired trading strategies that included making several deals, just a tiny percentage of which resulted in significant profits. Several more were marginal losses. Whereas system two used a 20-day high or low, system one’s exit criteria was a 10-day low for long positions and a 20-day high for short positions. Instead of using halt exit orders, they kept an eye on the price in real-time.

Rule #6: Market Strategies

Last but not least, the turtles learned some specifics about utilising limit orders and how to handle volatile markets, such as how to wait for quiet before placing orders rather than entering quickly and trying to acquire the ‘best’ price, as so many rookie traders do. They were also instructed to take advantage of momentum by purchasing the strongest markets and selling the weakest.

Pros and Cons of Turtle Trading

Pros

• Structured Rules: Turtle Trading is known for its clear and well-defined rules, providing a systematic approach to trading.
• Risk Management: The strategy incorporates effective risk management techniques, including pre-determined stop-loss orders to control potential losses.
• Adaptability: Turtle Trading can be applied to various markets and timeframes, allowing for adaptability in different trading conditions.

• Trend Following: The strategy focuses on capturing trends, making it suitable for traders looking to capitalise on sustained market movements.

Cons

• Mechanical Nature: The rigid and mechanical nature of Turtle Trading may limit the trader’s ability to adapt to rapidly changing market conditions.
• Drawdowns: Like any trend-following strategy, Turtle Trading may experience significant drawdowns during ranging or choppy market phases.
• Complexity for Beginners: The detailed rules and parameters may be overwhelming for novice traders, requiring a steep learning curve.

• No Fundamental Analysis: Turtle Trading solely relies on technical analysis, ignoring fundamental factors that might impact markets.

Conclusion

Turtle trading is a systematic strategy, aiming to capture long term trends in financial markets. It involves specific rules for entry and exit signals, risk management based on volatility, and a diversified portfolio approach. Known for its disciplined and systematic nature, turtle trading has influenced various trend-following systems in the financial industry since its inception.

Frequently Asked Questions (FAQs)