Turtle trading is a well-known trend-following method that traders employ in order to take advantage of long-term trends in the market. It is utilized in a variety of financial markets to identify breakouts to the upside and downside.
The term does not refer to how fast the trade is. Two American commodities traders, Richard Dennis and William Eckhardt fought it out and came up with the notion of teaching novice traders how to trade. They disagreed on the value of having a wealth of knowledge and expertise when it comes to trading.
Dennis was certain that he could teach people to become excellent traders, while Eckhardt was of the idea that trading success had a genetic link. They selected 23 individuals and sent them to Chicago to practice trading on micro-accounts there. Dennis said that the merchants would be raised in a similar manner to how turtles are raised in Singapore. As a result, the trainee traders were dubbed “turtles.”
How turtle trading works
Turtle trading is based on a strict set of mechanical laws. The goal is to remove emotions from the equation while making decisions. Traders must place orders solely in accordance with the regulations. The majority of them only adhere to trade guidelines when it comes to improvising when the situation calls for it. Deviating from the regulations, on the other hand, is in conflict with the turtle trading technique and may have a negative impact on the success of the trade.
Traders can use these guidelines in order to increase their profit margins. In the most basic sense, the strategy is to buy breakouts and exit the trade when the price stabilizes. It is also possible to use the opposite method of application.
Short trades can be made using the same rules as long transactions since a market can experience both uptrends and downtrends. Any time range can be used as an entry signal. However, in order to maximize earnings, the exit signal must be on a significantly shorter timeframe. Taking a large number of transactions, with just a few of them turning out to be significant winners and most of them losing money, is central to the turtle trading approach.
Trading regulations for turtles
“The turtles” were mostly trend-followers and breakout-watchers. As soon as the breakout occurred, they entered a long or short position and held it for as long as the trend continued to be strong.
As you may have guessed, they launched a long position on an upward breakout or sold if the market broke to the lower end of the range. If the turtles’ risk restrictions were not exceeded, they would go long or short anytime a breakout condition was enforced. First, there were two ways to get into the market.
- The short-term setup
“The turtles” got into positions when the price breached either the high or low of the previous 20 periods. The traders waited for the confirmation of a breakout based on a single pip above the 20-day high/low. Only if the preceding breakout failed was a 20-day breakout entry created. This indicates that the majority of people believe that the same thing will happen again. Stop losses are set at a 10-day low and a 10-day high for long and short positions, respectively.
- The long term setup
Traders who tracked wider market trends used this pattern as a trading tool. It was imperative that traders adhere to the guideline of 55 days and only enter if a breakout occurred.
They established a position with a single risk unit when they traded. This was followed by equal-sized accumulations depending on the trend’s direction. The setup relied heavily on risk units.
A premature exit might significantly reduce the potential profit on that trade. Trend-following systems often make this error. There were numerous trades taken by the turtles, but only a handful of them turned out to be significant winners.
A large number of other trades suffered just minor losses. The first system employed exits based on a 10-day low for long positions and a 20-day high for short positions. The second system used a 20-day high or low to determine exit for short positions.
To reduce dollar volatility, the turtles used a position-sizing algorithm that adjusted transaction size based on market dollar volatility. In an effort to increase diversification, this technique ensured that each stake in each market was the same size. There would be more trading in more liquid markets and less trading in less liquid marketplaces. The technique used the 20-day EMA of the actual range as a measure of market volatility.
The volatility of an asset determines the size of a trader’s stake. The primary concept was that a trader had to select the proper dollar amount of a given item. “The positions might be adjusted in terms of risk units.”
The turtles were given a formula by Dennis that helped them determine how many risk units they were exposed to. It was based on the computation of the number “N,” which indicated the volatility of a given market at the time. The traders applied the Average True Range (ATR) during the 20-period time frame.
The ATR for GBPUSD on August 12th, 2021, was 0.0082. GBPUSD has an average daily change of 82 pips, according to this calculation. Using the data we have, let’s convert it to US dollars. Based on a contract size of $10,000, the trade will result in:
USD volatility = 0.0082 x 10000=$82 per day
Equivalent “risk slices,” known as units, were used by the “turtles” whenever they shifted their positions. One unit is equal to 1% of the total risk.
The turtles were instructed to always employ stop losses to prevent excessive losses. They defined their risk in advance of the trade by determining their stop loss before taking positions. This helped them to escape a disaster by preventing their losses from growing out of hand. In order to prevent getting ‘whipsawed’ out of a deal in more turbulent markets, traders used larger stop-losses.
We can learn a lot about trading from the results of the turtle experiment. Without a strategy, a trader relies only on his or her hunch when deciding whether to enter or close a trade as well as how large a position should be.