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.
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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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