The Turtle Trading Strategy – Momentum Breakout Strategy
The Turtle Trading Strategy was actually born because of a disagreement between Richard Dennis a commodity speculator and his trading partner William Eckhardt over nature and nurture philosophy. Richard Dennis believed that average people could be trained and taught specific rules in order to become a profitable trader while William Eckhardt believed that trading success was a function of your innate talent and could not be taught.
In order to find out if successful trading can be taught, they hired a group of people called The Turtles and they were put through a rigorous training program and afterwards they were given a million dollars to trade. The Turtle experiment proved that successful trading can be taught as the group was able to generate millions of dollars in profits.
Going forward you’re going to learn more about the Turtle trading strategy and the rules of the system. In essence, the Turtle strategy is a trend following system and is designed more for the long-term traders.
The Turtle Trading Strategy
Basically, the Turtle system focused primarily on commodities, but the same system can be used in the Forex market as well because is a technical system it can be applied to any asset classes. The components of the Turtle Trading system are as follows:
- Markets: What to buy or sell;
- Position Sizing: How much to buy or sell;
- Entries: When to buy or sell;
- Stops: Where to get out of a losing position;
- Exits: when to get out of a winning position;
The turtle system should be used only in the most liquid currency pairs which are the majors. The original Turtle trading strategy used a complex position sizing calculation which was based on the dollar volatility of the market. The Turtles used a concept called N, which represent the underlying volatility of a particular market.
N= 20-day EMA of the Average True Range (ATR);
N represents the average range in price movement that a particular market experience in a single day. Were the True Range = maximum (H-L, H-PDC, PDC -L).
- H= Current High;
- L= Current Low;
- PDC= Previous Day Close;
The N value is also important for determining the stop loss level, which was always at 2xN, or 2% of the account balance. The Turtle trading strategy had two different entry techniques called System 1 and System 2:
- System 1: Entry long/short if the market breaks by 1pip the high/low of the preceding 20-days.
- System 2: The same as the System 1 but replacing th20-days and using the 55 day period instead.
The Turtle Trading Strategy has a very low winning percentage because most of the breakouts don’t result in a long-lasting trend and you have to endure lots of losses before to catch that one big trend that ultimately will make you a successful trader in the long run.
Where and When to take profit using the Turtle Trading Strategy?
The Turtle Trading Strategy 1 used as a take profit level a breakout of the 10-day low for long trades and a 10-day high for a short position, when this is triggered, all positions are exited at the market. The take profit rules for the System 2 was the same the System 1 but using the 20-day period instead. The Turtle Trading Strategy requires a strong level of discipline in order to be able to catch the big moves in a trend.
As you can already imagine this is not your typical trading strategy as the Turtle Trading Strategy it’s really designed for long-term traders that want to capture the big trend in the market. One of the biggest trader of all times Jesse Livermore concludes that:” It is the big swing that makes the big money for you,” so if you really want to trade in the same league with the smart money the Turtle Trading Strategy is a viable option.
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