• : August 6, 2020
  • : Prashant Shah

Turtle Trading system

Have you ever thought about this - Are good traders born that way or can someone be trained to become one?
 

Turtle

During 1983, Richard Dennis - a successful and popular trader had an argument with his friend William Eckhardt about this subject - whether great traders are born or made.

Richard = We can teach and create good traders

William = No, there are certain aspects which cannot be taught

They decided to do an experiment. They published an advertisement in the newspaper that they will train a group of people in their proprietary system & also give them the capital to trade the system. Interested candidates can apply, experience in market was not necessary. They got over 1,000 applications and 13 were finalized. They were from different backgrounds. They were trained for two-weeks in Chicago before they were given the money to trade.

The selected students were called the Turtles. Dennis said that they were going to grow traders like they grow turtles in Singapore. Their trading System known as Turtle trading system was an objective system having rules for everything – trading universe, Entry, Exit, Position sizing.

They were trading stocks, bonds, commodities, currencies, and many other markets. Liquidity was their important criteria due to the size they were trading.

There were two systems. Turtle Traders had option to decide allocation to these systems.

System 1:

  • Long: When price crosses 20-day high
  • Long Exit: If price falls below 10-day low
  • Short: When price falls below 20-day low
  • Short Exit: If price goes above 10-day high


Turtle

Buy as soon as price qualifies for above criteria. Do not wait for the closing.

There was a rule here. Irrespective of direction, Ignore the breakout if last trade was a winning trade - Last breakout whether you have traded it or not. So, it is not a rule for equity curve.

If breakout was missed because of this rule, then entry should be made on System 2.

System 2:

  • Long: When price crosses 55-day high
  • Long Exit: If price falls below 20-day low
  • Short: When price falls below 55-day low
  • Short Exit: If price goes above 20-day high


For system 2, all breakout should be taken whether previous trade was a winner or not

Turtle

Besides this exit rules, there was a rule for stop-loss for both systems. Stop-loss was twice of 20-day ATR price. So, stop-loss is 2-ATR below price for Long, 2-ATR above price for Short.  I have explained ATR here.

Turtle

There was a rule for position sizing as well: Maximum stop-loss should be 2% of total account size and quantity for the position will be decided accordingly. Upon breakout, they would by 1 unit. What is 1 unit?

For example, account size is 10 lacs. ATR is 100 points. Stop-loss becomes 200 points (2-ATR). Max loss is 2% of account size = 20,000. 1 unit = 100 qty (20,000 / 200). If you are trading in futures, divide it by lot size to know number of lots to be traded.

Turtles were using method of pyramiding – adding to winners. 1 unit to be added at every ½ of ATR move in favor, and there will be a rule for max units to be added to a position depending on the market they are trading. Eg, if Nifty gives breakout and ATR is 100. Buy 1 unit with stop-loss of 200 points. And add 1 unit at every 50-point move. Stop-loss of all quantities would be 2-ATR away from recent entry.

There were rules for Maximum units based on correlated, non-correlated, single market or based on direction and they played a key role in saving them from highly volatile or unfavourable days. There were trading diversified portfolio. There were rules for cutting the positions and risk during drawdown.

Rules are clear, so a trader would always know his buy – sell or exit price, right?

Though rules look simple today, the concepts like Volatility based stop and position sizing were very advanced then. Performance of the Turtle traders was measured based on their discipline. It is a breakout-based trend following method, few huge winners can change the picture for the entire year. Missing them because of disciplinary reasons would not be affordable for the system.

Turtles traded huge money based on this rule-based system. Many Turtle traders became successful and went on to become a successful traders and money managers.

There is much more to know about this system and the journey of turtle for which these books are must read. The Complete Turtle Trader by Michael Covel & Way of the Turtle by Curtis Faith.


Is the system still working? Argument is endless. People who focus on parameters would discuss that. System rules can differ, trend-following system would perform well in strong trending market. Methods evolve and not all can be comfortable with the same rules – Market exist because there is a buyer for every seller. 

I strongly recommend focussing on principle rather than the parameter of systems.
What was important thing about it:

  • Objective systems
  • Rule-based
  • Range breakout Trend following
  • Pyramiding
  • Clear Entry – exit and position sizing rules

Any trend following system would have low or moderate hit ratio but the risk-reward ratio will be high. There will be some big winners that will make the business successful. Consolidation and Volatile markets are unfavourable phases.

But execution is easier said than done. I feel it is true even for fundamental investing. Not all stocks that you hold in long-term would prove rewarding. There will be some huge winners which will make the portfolio profitable. Their Risk-reward ratio due to sitting in the profit makes them successful. Downtrend and long period of consolidation are unfavourable phases.

You will soon get the scanner for Turtle breakout in TradePoint which looks like below.

Turtle


P&F Turtle

We can apply Turtle rules on P&F charts as well.

What is the difference?

Turtle is a 20-day breakout method, a candle will appear irrespective of price movement. We can get a 20-day breakout during consolidation or range bound phase which may result in whipsaws.

P&F chart does not get plotted during sideways period, that can help in reducing trades during such phases.

I recommend 5-X Turtle breakout for bullish trades. See below image to understand the same.
Turtle

If current column of X goes above highest ‘X’ in last 5 columns (including current column), then it is a 5-X Turtle breakout.

When we say 5-Xs - it considers price movement of how many days?

Depends on the swing pattern. Period will be more in case of consolidation phase. Hence, this is a turtle breakout system based on price, not time.

Trading System:


Buy on 5-X turtle breakout and Sell on 5-O turtle breakout. You can also increase the parameter to 10-column instead of 5.

But there is more to write about this system. There can be few more rules added to the system to improve the performance of P&F turtle trading system.

But how to take advantage of this pattern in your current method of analysis.

Let’s create a pattern that can help you pick short-term trades?

P&F Turtle breakout shows us a consolidation breakout or range breakout. It can also be a continuation breakout which tells us that price is in a strong uptrend. In any case, price trading above last 5-Xs is an important information.

Turtle

P&F Follow-through is a master key to solve many problems. How about follow-through to 5-X turtle breakout?
Sell below image.

Turtle


We can define the initial risk and scan for the probable follow-through breakout.

Turtle
How to define a scanner?


Go to TradePoint -> Backtesting -> System Builder -> P&F -> Add

Put below mentioned conditions:

  1. Bullish Turtle breakout at 2
  2. Less than 8 boxes at 1
  3. Not double top buy at 0

Turtle

Normally, bearish strategies are opposite of bullish strategies. But with this case, I recommend a parameter of 3-Os instead of 5.


Below are conditions for Turtle FT – Bearish Probable

Turtle


Important:

This strategy is more useful on lower box-value such as 0.25% on EOD chart and 0.15% - 0.25% on one-min timeframe chart.

Below is a candidate that appears in EOD scanner of Bullish Turtle – FT probable.

Turtle

Like Turtles, what if I want to run a turtle breakout method based on High or low prices?


We can plot same pattern on High-low charts. Increase the box-value if you are doing that. Try that on 0.50% box-value for stocks.

Earlier, I discussed Darvas box system as well which was also a trend following system. Both these methods are range-breakout type of trend following methods. I will talk more about this in coming newsletters.

Story of turtle is one of its kind in the history of this business. It was an important experiment that teaches us many things. Richard Dennis and William Eckhardt were brilliant traders and ahead of their time.

“I always say that you would publish my trading rules in the newspaper, and no one would follow them. They key is consistency and discipline.” – Richard Dennis