Turtle Trading Explained

Mid 1983. Famous commodities (futures) speculator Richard Dennis argues with his buddy Bill Eckhardt about whether great traders can be trained, or whether it is an innate ability. To settle the argument of nature versus nurture, they decide to try and teach 13 beginners to trade, and if they can master the rules, fund them with large trading accounts. These beginners, whittled down from over 1000 applicants, are known as the 'Turtles'. Over the next four years, the Turtles earned a collective compound rate of return of over 80%. Argument settled.

Turtle Trading - What Markets?

As they were trading million dollar-plus accounts, the Turtles had to choose liquid instruments, including US Treasury Bonds, Coffee, Cocoa, Sugar, Cotton, Gold SIlver, Coper, major currencies and Indices, and Oils.

Turtle Trading - Position Sizing

All good trading systems pay strict attention to position sizing. The control of risk is the elementary building block upon which good trading is based, and Turtle Trading is no exception. The Turtles used 'Volatility normalization' - a fancy way of saying that the more volatile an instrument, the smaller the trade, meaning that every instrument would (hopefully) carry the same dollar risk.This is where the much-talked-about 'N' comes from.

'N' is the 20-day exponential moving average of the ATR (true range). The formula to calculate 'N' is:-

(19 x Previous Days N + TR) / 20

Next step - figure out the 'Dollar Volatility Adjustment'. This is simply (N x Dollars per point). This was done so the size of a 'Unit' could be calculated. Each 'Unit' would account for 1% of the trader's equity, in other words, a Unit equals:-

1% of account / Dollar Volatility

As an example, assume an instrument that moves $100 per point. Assume also that the account size is $10,000. For simplicity, assume N = 0.1.

A Unit then , is:-

(1% x $10,000) / (0.1 X $100)

i.e. $10.

Turtle Trading - Risk Adjustment

Turtles had 'notional' sized accounts - although an account might notionally start the year at $1,000,000, in the case of a loss of 10%, the size of this account would be reduced by 20%. In other words the trader would have to trade as if he only had $800K, not $900, until such time as the account had got back to the starting figure.

Turtle Trading - Trade Entries

Turtles entered trades based on two systems, a 20 day breakout system, and a 55 day breakout system. To use the first system, if the market traded during the day or opened thru the 20 day high or low, that would be a signal to enter.One Unit would be bought/sold to initiate the position.If the previous signal would have resulted in a successful trade, this signal would be ignored, in an attempt to avoid 'whipsawing'.

The second system fired signals if price exceeded the 55 day high or low, and these signals were always taken, irrespective of previous success/failure.

Turtle Trading - Adding to Positions

Once in a position, Turtles would add a Unit every 1/2 'N' advance, up to the maximum number of units they were permitted (4 in a single instrument, 6 in 'Closely Correlated' markets, such as Oil and Crude, 10 units in 'Loosely Correlated' markets, 12 units overall in a single direction).

The prime directive in all of this was CONSISTENCY. As the majority of trades failed, it was essential to be in on ALL of them, so as not to miss the few huge winners that made the profits.

Turtle Trading - Stops and Exits

No trade was allowed to incur more than 2% of the account equity in risk - in other words the Turtles used mental stops no more than 2 'N' away from the position.

To exit from a System 1 trade, if the 10 day high (short trade) was broken, that meant close the trade. Likewise if the 10 day low (long trade) was broken, close th etrade. To exit from a System 2 trade, a 20 day breakout in the opposite direction would signal the end of the trade.

Turtle Trading - does it work?