TURTLE TRADING - STRATEGY EXPLAINED ✅
Updated
Currently, the forex market offers numerous different tools to improve trading. Experts in financial markets develop both simple trading strategies, which will be convenient for novice traders, and complex systems, combining several strategies. Besides, experienced participants in the market develop their own strategies for their trading. They base their systems on the elements of technical analysis, trend lines as well as support and resistance indicators.
At the same time, the quality and efficiency of a trading strategy are not measured by its complexity and the presence of a large number of elements. One such example is the Turtle trading strategy developed by trader Richard Dennis in the 1980s.
As an experiment, Dennis decided to form a trading strategy that would help beginner traders to become professionals. That being said, financial markets are full of risks and no strategy guarantees a market participant a 100% achievement of profit. The only commitment that can lead a trader to success is to follow the rules of money management. In addition, traders must accurately use their trading strategy.
The market shows that even in the same market positions and quotes of trading assets, traders act differently and the result of the trade is often different. That is, it depends on the actions and decisions of a market participant whether a trading strategy will work to achieve profit or not. One unsuccessful trade can make a trader slacken, and someone, after making a loss, is sure to win and get a good profit.
Richard Denis's Legendary Experiment
Richard Denis once argued with his friend William Eckhardt. The latter assured him that trading is a talent. To be a successful trader a person must have certain qualities: an analytical mind and intuition. Denis proved that to be a successful trader it is enough to follow the strategy rules. As a result, an experiment was conducted.
Denis recruited a group of 23 volunteers who came to him by advertisement. There were 21 men and two women who had never dealt with trading. Among the volunteers were ordinary people.
The training lasted 14 days. After that, the generous teacher allocated his students a million dollars of initial capital each and sent them on a consolidated exchange voyage. The further experiment lasted for 5 years.
After it was over, it turned out that 23 million dollars invested brought a total income of 175 million, i.e. the initial capital was increased 7.5 times.
Some became successful traders and made a lot of money. Others went bust. Who was right? Most likely both. To be successful, it is necessary not only to have a good strategy but also to have certain qualities. Subsequently, one of the first students of Richard Denis, Curtis Faith, wrote a book about this method, "The Turtle Way. From Amateurs to Legendary Traders", which became a bestseller.
The Essence Of The Turtle Trading
It involves a time interval of 20 and 55 days. The trend is monitored at a given time interval. The entry is carried out at the moment of breakout. If the price exceeds the limits, it is the entry signal. The exit signal is a price break out in the opposite trend direction of the same time interval. This strategy allows for insignificant losses, but as a result, the trader still makes a profit.
Turtle strategy requires careful monitoring of the trend because with the time interval of 55 days for a year can be placed from 3 to 5 positions. Things are a bit easier with the 20-day interval, but it also has its own peculiarities. Denis has developed the following rule: at the breakout of the price on 10-day intervals the previous entrance is considered. It may not have been performed, but the analysis is mandatory. If that entry has brought profit, the current breakout is ignored. This rule is not valid when working with the 55th extremum.
Particular attention is paid to the volatility of the trade at the moment. If volatility is low, placing a trade is not recommended because a multimillion-turtle entry could change the situation on the market.
Of course, there is risk in every trade. According to Richard Denis, the risk should not exceed 1% of the deposit. In the process, if there was a steady trend, orders could be added. The risk on additional orders should not exceed a quarter of a percent of the deposit. The deposit should withstand losses and wait for a steady trend, which would invariably bring profit. To control the deposit the notion of the unit - the minimum transaction amount was introduced.
Indicators And Tools For Turtle Trading
The work according to this trading strategy can be done on a clean chart, but it is somewhat inconvenient. You will have to count candles and rebuild levels on your own daily. Indicators solve this problem and do not distort the essence of the Turtle strategy.
Among the indicators, we will need the Donchian channel, the standard ATR, and The Classic Turtle Trader, which will be described below. The last tool is used to exit the market.
Market Entry And Stop Loss
Three Donchian channels with periods of 10, 20, and 55 are set in the chart. There are 2 types of entries:
Breakout of the 20-day Donchian Channel. There are no special filters to identify the breakout, it is enough to exceed the High or Low by at least one point. If the first signal of this type has already been closed with a profit and a second one is formed, it is not considered;
Breakout of the 55-day Donchian channel. A slower variant of work. If the filter on the previous rule is triggered and the entry point on the 20-day Donchian Channel is not taken, you can enter by the slower indicator. When working with a slower Donchian Channel, there is no such filter as in the previous case.
The Turtle strategy in the stock market did not involve physical Stop Losses, they were rather virtual. Traders worked with too much volume; if they placed stops, other speculators would have seen them and adjusted their work. Instead, a level was calculated at which the position was manually closed at a loss.
For forex, it could be taken as 2 x ATR with a period of 20. Since the work is done on daily charts, the stop value will be higher in pips.
Manual loss fixing was not a problem for the Turtles. Volatility was relatively low at the time. It is not advisable to trade forex without stops, there is a risk of getting caught in an impulse movement, and without SL the loss may be too big.
Turtles agreed that the win rate will not be in their favor. The strategy is based on breakouts of levels and is trend-following, but not every breakout turns into a trend. The point is that a profit on one trade that has worked in the positive direction will make up 2-3 losing trades and bring the total result in the positive direction.
Market Exit
In this strategy, some of the profits will inevitably be missed. No trend-following strategy allows you to take all of the trend movement at 100%, the Turtle system - is no exception to this rule. It is necessary to make sure that the trend is over, because of this the profit is somewhat reduced.
The basic rules do not provide a fixed Take Profit. The trade is either closed by a Stop Loss or manually.
At the beginning of each trade, the Stop Loss is placed 2N below the entry price in case of a long position or 2N above the entry price in case of a short position. This helped to reduce losses if the price did not change favorably after entry.
If new positions are added (on every 1/2N favorable move), the last Stop Loss was also moved by 1/2N. This usually meant that the Stop Loss would always be 2N away from the most recent entry (although it could vary slightly depending on the slippage).
There is another Stop Loss method called Whipsaw. With this method, the Stop Loss is placed 1/2N away from the entry point.
If the price did not reach the Stop Loss, then System 1 and System 2 exit methods were used.
If there is a breakout of the 20-day channel, the position is closed if the chart crosses the 10-day Donchian channel in the opposite direction.
If the market entry was upon the breakout of the 55-day High/Low, the position is closed if the chart crosses the 20-day channel in the opposite direction.
It is psychologically difficult to hold a profitable position and watch profits decline, but it is a must. If one fixes a profit before these rules are met, there is a great chance of not making a profit.
Short-Term And Long-Term Turtle Trading
When short-term trading, an interval of 20 days is considered. A maximum and minimum are determined. If the price breaks out the maximum by at least 1 point, it is a signal for buying. If the price breaks out the minimum over the same period, it is a signal to sell. If the previous trade in this system is profitable (it does not matter if it is executed or not), then it is not recommended to place an order. If the trend reverses on the 10-day extrema in the opposite direction from the position opening, it is a closing signal.
The long-term system involves the use of daily candlesticks for a period of 55 days. The principle is the same: when the price breaks out the maximum - is bought, and when it breaks out the minimum - is sold. But it is recommended to place an order only with one unit (minimum amount). Then if the trend is steady the orders can be added, but no more than one unit each time. The signal for closing is considered to be a trend moving in the opposite direction to the opening at the 20-day extremums.
What Are The Best Assets For Turtle Trading?
The Turtles traded in large liquid markets. They had to do this because of the size of the positions they entered. They basically traded in all of these liquid markets except meat and grain.
Grains were banned because Dennis himself reached the maximum amount in his trading account. The trader was limited to the number of options or futures he could have, which meant that there were no Turtles left to trade under his name.
Here's an example of what the Turtles used to trade:
10- and 30-year U.S. Treasury bonds and 90-day U.S. Treasury bills;
Commodities such as coffee, cocoa, sugar, cotton, crude oil, heating oil, and unleaded gas;
Currencies such as the Swiss franc, British pound, Japanese yen, and Canadian dollar;
Precious metals such as gold, silver, and copper.
They also traded futures on indices such as the S&P 500.
One interesting thing to note is that if a trader decided not to trade a commodity in the market, he had to give up that market entirely. So, if one of the Turtles didn't want to trade crude oil, they had to stay away from everything else in that market, such as heating oil or unleaded gas.
How To Apply The Turtle Strategy To Forex Market
Let's consider the work of the Turtle method on forex. Let's take a short-term period of 20 days. Let's select the pair with high volatility. If you remember, this indicator has not played the last role in the application of the method. With low volatility, the Turtles could "make the market" and the strategy would be powerless. The indicator ATR (Average True Range) is used to determine volatility.
Using the Donchian Channels, we identify the trends for 10 and 20 days. The last candle is selected on the chart. Count backward from it 20 candles. The maximum and minimum are identified on these 20 candles. Horizontal lines are drawn through these points. If the price goes beyond one of the lines, it is a signal. The price breaks out the maximum - the currency should be bought The price breaks out the minimum - we should sell.
The order is placed on an amount, which does not exceed 10% of the deposit. During the process, it is possible to make "additions". It is made only if there is a profit of 0.5% of the deposit. It may look like this. We have a deposit of $1000. Let us assume that the price has broken out the upper border for 3 points and a trade was opened for $100. The trend has steadily gone upwards. "Addition" can be made only when the profit from the invested $100 reaches at least $5. At that point, another $100 is added. The next addition can be made when the profit of $15, that is when the first trade will bring 10% profit, and the second 5%.
The stop order is set at the minimum of the last three days. Count back three candles from the time of your entry, and find the minimum - this will be the stop order. If among the last three candles, a specific minimum is not traceable, then find the point corresponding to 1% of the deposit, and the stop order is set on it. For example, 1% of a deposit of $1000 is equal to $10. We analyze the price of one pip, i.e. one pip of currency movement. We divide $10 by the price of a pip. We obtain the number of pips that should be subtracted in the opposite direction from the trend direction since the trade was opened. We set the Stop Loss there. It is the same for the main trade, as well as for the ones we add.
Exit from the market occurs when the price will fall to a 10-day minimum. For a short position, the exit point is the price of the 10-day high.
For a long-term 55-day trade, 20-day candles are considered for determining the stop order and exit point.
Conclusion
In the Turtle experiment, the strategy itself is secondary. What is more important is that the real example proves that no talent is needed in trading. It is a profession, and everyone can master it. It is impossible to get the results demonstrated by the Turtles in casual trading.
As for the strategy itself, even the basic rules still work. The best result is achieved in equities trading, on forex, it is necessary to optimize, and probably revise the rules to look for entry points in the H4 time frame. Long-term trends are formed less often here, so work in D1 shows no best result.
In general, the Turtle strategy is considered quite profitable. But it is necessary to be mentally prepared for expectation and the correct arrangement of trading positions. Adhere to the conditions of entry into the market and exit from trading positions, and then you will achieve a positive result.
At the same time, the quality and efficiency of a trading strategy are not measured by its complexity and the presence of a large number of elements. One such example is the Turtle trading strategy developed by trader Richard Dennis in the 1980s.
As an experiment, Dennis decided to form a trading strategy that would help beginner traders to become professionals. That being said, financial markets are full of risks and no strategy guarantees a market participant a 100% achievement of profit. The only commitment that can lead a trader to success is to follow the rules of money management. In addition, traders must accurately use their trading strategy.
The market shows that even in the same market positions and quotes of trading assets, traders act differently and the result of the trade is often different. That is, it depends on the actions and decisions of a market participant whether a trading strategy will work to achieve profit or not. One unsuccessful trade can make a trader slacken, and someone, after making a loss, is sure to win and get a good profit.
Richard Denis's Legendary Experiment
Richard Denis once argued with his friend William Eckhardt. The latter assured him that trading is a talent. To be a successful trader a person must have certain qualities: an analytical mind and intuition. Denis proved that to be a successful trader it is enough to follow the strategy rules. As a result, an experiment was conducted.
Denis recruited a group of 23 volunteers who came to him by advertisement. There were 21 men and two women who had never dealt with trading. Among the volunteers were ordinary people.
The training lasted 14 days. After that, the generous teacher allocated his students a million dollars of initial capital each and sent them on a consolidated exchange voyage. The further experiment lasted for 5 years.
After it was over, it turned out that 23 million dollars invested brought a total income of 175 million, i.e. the initial capital was increased 7.5 times.
Some became successful traders and made a lot of money. Others went bust. Who was right? Most likely both. To be successful, it is necessary not only to have a good strategy but also to have certain qualities. Subsequently, one of the first students of Richard Denis, Curtis Faith, wrote a book about this method, "The Turtle Way. From Amateurs to Legendary Traders", which became a bestseller.
The Essence Of The Turtle Trading
It involves a time interval of 20 and 55 days. The trend is monitored at a given time interval. The entry is carried out at the moment of breakout. If the price exceeds the limits, it is the entry signal. The exit signal is a price break out in the opposite trend direction of the same time interval. This strategy allows for insignificant losses, but as a result, the trader still makes a profit.
Turtle strategy requires careful monitoring of the trend because with the time interval of 55 days for a year can be placed from 3 to 5 positions. Things are a bit easier with the 20-day interval, but it also has its own peculiarities. Denis has developed the following rule: at the breakout of the price on 10-day intervals the previous entrance is considered. It may not have been performed, but the analysis is mandatory. If that entry has brought profit, the current breakout is ignored. This rule is not valid when working with the 55th extremum.
Particular attention is paid to the volatility of the trade at the moment. If volatility is low, placing a trade is not recommended because a multimillion-turtle entry could change the situation on the market.
Of course, there is risk in every trade. According to Richard Denis, the risk should not exceed 1% of the deposit. In the process, if there was a steady trend, orders could be added. The risk on additional orders should not exceed a quarter of a percent of the deposit. The deposit should withstand losses and wait for a steady trend, which would invariably bring profit. To control the deposit the notion of the unit - the minimum transaction amount was introduced.
Indicators And Tools For Turtle Trading
The work according to this trading strategy can be done on a clean chart, but it is somewhat inconvenient. You will have to count candles and rebuild levels on your own daily. Indicators solve this problem and do not distort the essence of the Turtle strategy.
Among the indicators, we will need the Donchian channel, the standard ATR, and The Classic Turtle Trader, which will be described below. The last tool is used to exit the market.
Market Entry And Stop Loss
Three Donchian channels with periods of 10, 20, and 55 are set in the chart. There are 2 types of entries:
Breakout of the 20-day Donchian Channel. There are no special filters to identify the breakout, it is enough to exceed the High or Low by at least one point. If the first signal of this type has already been closed with a profit and a second one is formed, it is not considered;
Breakout of the 55-day Donchian channel. A slower variant of work. If the filter on the previous rule is triggered and the entry point on the 20-day Donchian Channel is not taken, you can enter by the slower indicator. When working with a slower Donchian Channel, there is no such filter as in the previous case.
The Turtle strategy in the stock market did not involve physical Stop Losses, they were rather virtual. Traders worked with too much volume; if they placed stops, other speculators would have seen them and adjusted their work. Instead, a level was calculated at which the position was manually closed at a loss.
For forex, it could be taken as 2 x ATR with a period of 20. Since the work is done on daily charts, the stop value will be higher in pips.
Manual loss fixing was not a problem for the Turtles. Volatility was relatively low at the time. It is not advisable to trade forex without stops, there is a risk of getting caught in an impulse movement, and without SL the loss may be too big.
Turtles agreed that the win rate will not be in their favor. The strategy is based on breakouts of levels and is trend-following, but not every breakout turns into a trend. The point is that a profit on one trade that has worked in the positive direction will make up 2-3 losing trades and bring the total result in the positive direction.
Market Exit
In this strategy, some of the profits will inevitably be missed. No trend-following strategy allows you to take all of the trend movement at 100%, the Turtle system - is no exception to this rule. It is necessary to make sure that the trend is over, because of this the profit is somewhat reduced.
The basic rules do not provide a fixed Take Profit. The trade is either closed by a Stop Loss or manually.
At the beginning of each trade, the Stop Loss is placed 2N below the entry price in case of a long position or 2N above the entry price in case of a short position. This helped to reduce losses if the price did not change favorably after entry.
If new positions are added (on every 1/2N favorable move), the last Stop Loss was also moved by 1/2N. This usually meant that the Stop Loss would always be 2N away from the most recent entry (although it could vary slightly depending on the slippage).
There is another Stop Loss method called Whipsaw. With this method, the Stop Loss is placed 1/2N away from the entry point.
If the price did not reach the Stop Loss, then System 1 and System 2 exit methods were used.
If there is a breakout of the 20-day channel, the position is closed if the chart crosses the 10-day Donchian channel in the opposite direction.
If the market entry was upon the breakout of the 55-day High/Low, the position is closed if the chart crosses the 20-day channel in the opposite direction.
It is psychologically difficult to hold a profitable position and watch profits decline, but it is a must. If one fixes a profit before these rules are met, there is a great chance of not making a profit.
Short-Term And Long-Term Turtle Trading
When short-term trading, an interval of 20 days is considered. A maximum and minimum are determined. If the price breaks out the maximum by at least 1 point, it is a signal for buying. If the price breaks out the minimum over the same period, it is a signal to sell. If the previous trade in this system is profitable (it does not matter if it is executed or not), then it is not recommended to place an order. If the trend reverses on the 10-day extrema in the opposite direction from the position opening, it is a closing signal.
The long-term system involves the use of daily candlesticks for a period of 55 days. The principle is the same: when the price breaks out the maximum - is bought, and when it breaks out the minimum - is sold. But it is recommended to place an order only with one unit (minimum amount). Then if the trend is steady the orders can be added, but no more than one unit each time. The signal for closing is considered to be a trend moving in the opposite direction to the opening at the 20-day extremums.
What Are The Best Assets For Turtle Trading?
The Turtles traded in large liquid markets. They had to do this because of the size of the positions they entered. They basically traded in all of these liquid markets except meat and grain.
Grains were banned because Dennis himself reached the maximum amount in his trading account. The trader was limited to the number of options or futures he could have, which meant that there were no Turtles left to trade under his name.
Here's an example of what the Turtles used to trade:
10- and 30-year U.S. Treasury bonds and 90-day U.S. Treasury bills;
Commodities such as coffee, cocoa, sugar, cotton, crude oil, heating oil, and unleaded gas;
Currencies such as the Swiss franc, British pound, Japanese yen, and Canadian dollar;
Precious metals such as gold, silver, and copper.
They also traded futures on indices such as the S&P 500.
One interesting thing to note is that if a trader decided not to trade a commodity in the market, he had to give up that market entirely. So, if one of the Turtles didn't want to trade crude oil, they had to stay away from everything else in that market, such as heating oil or unleaded gas.
How To Apply The Turtle Strategy To Forex Market
Let's consider the work of the Turtle method on forex. Let's take a short-term period of 20 days. Let's select the pair with high volatility. If you remember, this indicator has not played the last role in the application of the method. With low volatility, the Turtles could "make the market" and the strategy would be powerless. The indicator ATR (Average True Range) is used to determine volatility.
Using the Donchian Channels, we identify the trends for 10 and 20 days. The last candle is selected on the chart. Count backward from it 20 candles. The maximum and minimum are identified on these 20 candles. Horizontal lines are drawn through these points. If the price goes beyond one of the lines, it is a signal. The price breaks out the maximum - the currency should be bought The price breaks out the minimum - we should sell.
The order is placed on an amount, which does not exceed 10% of the deposit. During the process, it is possible to make "additions". It is made only if there is a profit of 0.5% of the deposit. It may look like this. We have a deposit of $1000. Let us assume that the price has broken out the upper border for 3 points and a trade was opened for $100. The trend has steadily gone upwards. "Addition" can be made only when the profit from the invested $100 reaches at least $5. At that point, another $100 is added. The next addition can be made when the profit of $15, that is when the first trade will bring 10% profit, and the second 5%.
The stop order is set at the minimum of the last three days. Count back three candles from the time of your entry, and find the minimum - this will be the stop order. If among the last three candles, a specific minimum is not traceable, then find the point corresponding to 1% of the deposit, and the stop order is set on it. For example, 1% of a deposit of $1000 is equal to $10. We analyze the price of one pip, i.e. one pip of currency movement. We divide $10 by the price of a pip. We obtain the number of pips that should be subtracted in the opposite direction from the trend direction since the trade was opened. We set the Stop Loss there. It is the same for the main trade, as well as for the ones we add.
Exit from the market occurs when the price will fall to a 10-day minimum. For a short position, the exit point is the price of the 10-day high.
For a long-term 55-day trade, 20-day candles are considered for determining the stop order and exit point.
Conclusion
In the Turtle experiment, the strategy itself is secondary. What is more important is that the real example proves that no talent is needed in trading. It is a profession, and everyone can master it. It is impossible to get the results demonstrated by the Turtles in casual trading.
As for the strategy itself, even the basic rules still work. The best result is achieved in equities trading, on forex, it is necessary to optimize, and probably revise the rules to look for entry points in the H4 time frame. Long-term trends are formed less often here, so work in D1 shows no best result.
In general, the Turtle strategy is considered quite profitable. But it is necessary to be mentally prepared for expectation and the correct arrangement of trading positions. Adhere to the conditions of entry into the market and exit from trading positions, and then you will achieve a positive result.
Note
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