I’ve always been fascinated by the best traders in history. Trading is my favorite professional sport. It piqued my interest when I first heard about the Turtle Trading System. You see, it’s a trend-following trading system created by Richard Dennis and William Eckhardt in the 1980s. They wanted to prove that anyone could learn to trade successfully if they followed a set of rules. So, they recruited a group of novice traders, taught them their system, and watched them succeed. In this post, I’ll dive deep into the Turtle Trading System and how it can still be relevant today.
The Foundation of the Turtle Trading System
At its core, the Turtle Trading System is built on trend-following principles. Dennis and Eckhardt believed that the key to success in trading was to identify and follow market trends. They reasoned that markets tend to move in trends, and by hopping on board these trends, traders could potentially make a profit.
One of the primary reasons the Turtle Trading System is so effective is its focus on long-term price action. It doesn’t get bogged down by short-term market fluctuations. Instead, it patiently waits for clear trends to emerge and capitalizes on them. This approach allows traders to ride out temporary market setbacks and focus on the bigger picture.
Entry and Exit Signals in the Turtle Trading System
The Turtle Trading System uses specific rules for entering and exiting trades. For example, to enter a long position (buying an asset), traders would look for a 20-day price breakout. This means the asset’s price should be higher than its highest in the previous 20 days. Conversely, to enter a short position (selling an asset), traders would look for a 20-day price breakout to the downside.
Exiting trades in the Turtle Trading System is also rule-based. For instance, traders use a trailing stop order to lock in profits and minimize losses. This stop order is adjusted as the market moves in favor of the trade, ensuring that profits are protected while giving the trade room to grow.
The Turtles were taught to trade inside the context of a complete trading system.
Markets – What to buy or sell
- The Turtles traded all significant futures contracts, metals, currencies, and commodities.
- The turtles traded multiple markets to diversify risk.
Position Sizing – How much to buy or sell
- Turtle position sizing was based on a market’s volatility using the 20-day exponential moving average true range.
- The Turtles were taught to trade in increments of 1% of total account equity,
Entries – When to buy or sell
- The Turtles traded a Donchian breakout system, System 1 entered a 20-day breakout, and System 2 entered a 55-day breakout.
- Positions were added to a winning trend. (pyramiding)
Stops – When to get out of a losing position
- System 1 exited at a 10-day breakout in the opposite direction of the entry, and System 2 exited at a 20-day breakout in the opposite direction after the entry.
- No trade could incur more than a 2% equity risk, and stop losses were planned accordingly
Tactics – How to buy or sell
- Confidence, consistency, and discipline are the most critical aspects of successful trading.
- The Turtles believed that successful traders used mechanical trading systems.
- They traded liquid markets only.
Turtle traders bought strength, sold weakness, controlled risk, and followed their rules.
Risk Management and Position-Sizing Strategies
Risk management is crucial in any trading system, and the Turtle Trading System is no exception. It employs a “fixed fractional position sizing” strategy to manage risk. This means traders allocate each trade a fixed percentage of their account balance. They’d typically risk 1-2% of their account on any trade. Dennis wanted the maximum risk allowed in the highest probability trades.
By risking only a small portion of their account on each trade, traders can minimize the impact of losses and keep their overall risk in check. This approach also allows them to take advantage of the power of compounding as their account balance grows over time.
Diversification and Portfolio Management Techniques
Diversification is another crucial component of the Turtle Trading System. Traders are encouraged to diversify across different markets and asset classes, which helps spread risk and improve overall returns. This might include trading various commodities, currencies, and stock indices.
The Turtle Trading System also emphasizes the importance of portfolio management. By actively monitoring and adjusting their positions, traders can ensure that they’re not overexposed to any single market or asset class and that their portfolio remains balanced and aligned with their risk tolerance.
The Importance of Discipline and Consistency in Turtle Trading
Discipline and consistency are critical to the success of the Turtle Trading System. Following the rules and sticking to the plan is essential, even during market turbulence or when trades aren’t going well. This unwavering adherence to the system allows traders to ride out the ups and downs of the market and ultimately achieve success.
It’s worth noting that the Turtle Trading System isn’t foolproof, and no system can guarantee profits. However, by maintaining discipline and consistency, traders increase their chances of success over the long term. The key to the Turtle System was creating good risk/reward ratios in the direction of the primary market trend while managing risk and staying disciplined.
Adapting the Turtle Trading System for Modern Markets
While the Turtle Trading System was developed in the 1980s, its principles remain relevant today. That said, traders may need to adjust to account for market conditions and technology changes. For example, the rise of algorithmic and high-frequency trading may require traders to adapt their entry and exit signals or incorporate additional filters to avoid false breakouts.
Additionally, the availability of new asset classes, such as cryptocurrencies, provides more opportunities for diversification. Traders can also use modern tools and platforms to help manage their portfolios and execute trades more efficiently.
- The Turtle Trading System is based on trend-following principles and focuses on long-term market movements.
- Entry and exit signals rely on price breakouts and trailing stop orders.
- Risk management is achieved through fixed fractional position sizing, typically risking 1-2% of the account balance per trade.
- Diversification and portfolio management help spread risk and maintain a balanced portfolio.
- Discipline and consistency are essential for success with the Turtle Trading System.
- Adapting the system for modern markets involves considering new asset classes and utilizing advanced tools and technology.
The Turtle Trading System is a fascinating and historically successful approach to trading. Its emphasis on trend-following, risk management, diversification, and discipline provides a solid foundation for any trader looking to navigate the often unpredictable world of finance. While the system may require some adaptation for modern markets, its core principles remain relevant and offer valuable insights for novice and experienced traders. By understanding and applying the lessons of the Turtle Trading System, anyone can succeed in the trading world by capturing significant trends in the market as they occur.
Michael Covel did a great job covering the full story of the famous Turtle Traders in his book: The Complete TurtleTrader: How 23 Novice Investors Became Overnight Millionaires for those interested in reading their whole story.