Turtle Trading: A Complete Guide

Richard Dennis and William Eckhardt undertook the whole concept of the Turtle Traders experiment in the early 1980s to investigate hence if anyone could be taught how they can make money trading. The experiment entailed selecting a random group of people by teaching them a set of trading rules and observing their final performance.

Right through this guide, we will look at some of the basic rules needed to know about Turtle Trading Rules and how they function in a market.

What is turtle trading?

Turtle trading is a well-known trend-following approach used by traders to profit from long-term momentum. It is utilized in various financial markets to seek breakouts on both the upside and downside.

Dennis's concept was to develop a mechanical technique that would allow traders to follow the rules rather than relying on "gut instinct." A group of inexperienced traders was taught how to obey the regulations and then given $1 million to handle success.

Dennis would choose a group of individuals, educate them on a set of investing rules, and present them with trading funds. He was so sure of the rules that he put his own money into the trial with the trader. Dennis placed upon an advertisement for the two-week course in The Wall Street Journal.

Thousands of people responded to the advertisement for a chance to learn the ropes. Only 14 traders, though, would make it all through. This is because of the turtle farms he had visited in Singapore; Dennis referred to them as the 'Turtles.' As the farm-grown turtles predicted, the traders would somehow expand fast and much effectively.

The history of turtle trading

Even though pattern following is an old idea, it took structure after the Chicago broker Richard Dennis began the turtle dealer's bunch.

Other verifiable brokers classified as pattern devotees include David Ricardo, Jesse Livermore, Richard Wyckoff, Arthur Cutten, Charles Dow, Henry Clews, William Dunnigan, Richard Donchian, Nicolas Darvas, Amos Hostetter, and Richard Russell.

Everything began when Richard Dennis and William Eckhardt got into a discussion on whether or not exchanging could be educated. To settle this discussion, Richard Dennis posted a notice in the Wall Street Journal, Barron's, and the International Herald Tribune in 1983 to track down his understudies.

This had, subsequently, the arrangement of the main turtle merchants bunch that was accumulated of 21 men and 2 ladies.

One turtle broker visited Singapore on schedule and saw a turtle ranch. When returned, the name "turtle dealers" was recommended to the gathering as an allegory. So Richard Dennis raised a broker out of every last one of the dealers as the rancher raised turtles on the homestead.

Following a 2-week escalated hypothetical preparation, each Turtle got a record supported by his cash for them to exchange exclusively. When the examination finished, they had delivered a $175'000'000 benefit.

It is worth focusing on that from the entire 23 starting turtle broker gathering, just one individual exchanges right up 'til today and has his exchanging organization. He goes by Jerry Parker.

In 1984, was the second method of turtle merchants and in 1985 a third!

How can turtle traders identify a trend?

There are three basic patterns that turtle dealers can monitor to form trades. First, uptrends happen when stock costs increase. Turtle traders can go long on the stock as it's rising. Finally, downtrends occur when a stock is falling.

A trading dealer can go brief on a stock's falling price. Sideways patterns happen when stocks are not coming to one higher or lower focuses.

Turtle traders may not act on these patterns, but day traders who need to bounce on short-term market movements may need to move on sideways trends.

The turtle trading rules

Markets traded

Futures contracts were traded by the turtles, who sought out highly liquid markets to trade without disrupting the market. The turtles traded commodities, metals, energy, bonds, foreign exchange, and the S&P 500.

Position-sizing

The turtles used a position-sizing algorithm which adjusted their trade size according to market volatility to normalize the dollar volatility of their position.

By ensuring that each position in each market was the same size, this system tried to improve diversification. As a result, contracts traded on markets with higher liquidity would be fewer, while contracts with lower liquidity would be more.

This can be accomplished on the IG platform using the Average True Range indicator, which indicates how volatile a market is based on the 20-day exponential moving average of the valid range.

Entries

Two various entry systems have been used. For the first, breakouts were defined by 20-day highs and lows or by 55-day breakouts. Those in the top four places would have their positions added to.

To ensure they don't miss out on any signals, the turtles were instructed to take all signals available to them since missing a signal could result in a lower return overall.

Stop losses

To ensure that losses did not become too large, the turtles were taught to stop losses as much as possible. Before placing the trade, they defined their risk by defining their stop loss before entering the position.

Thus, they avoided losing vast amounts of money, in the same manner as famous trader Nick Leeson. In addition, more volatile markets had wider stops to avoid being 'whipsawed' out of the trade.

Exits

The possibility of winning on the trade is severely hampered by getting out too early. Trend-following systems are susceptible to this mistake. In turtle trading systems, trading involves many trades that turn into big winners, but not all of them. 

Many others were smaller losses. In system one, long positions were exited by a 10-day low, while short positions were exited by a 20-day high or low. Rather than using stop exit orders, they watched the price in real-time.

Tactics

The turtles learned about limited orders and how to deal with fast-moving markets, including how to wait for calm before placing orders, rather than rushing in and trying to get the 'best' price, as many new traders do.

The best stocks to buy, and the worst to sell, were also taught to benefit from momentum.

Market Entry

Two different market entry tactics may be based on two additional breakouts (upside and downside). As a result, traders choose a 20-day breakout regardless of its high or low. 

In addition, turtles should use all the available signals in the turtle trading strategy. A failed attempt at least one would mean missing a big win and a potential trade.

The 55-day breakout and winning positions involving up to four market entries would lower the returns and ruin the trading algorithm.

Explain the turtle trading experiment

By adhering to a set of proven criteria, turtle traders can earn great returns. The results, however, are the equivalent of tossing a coin. A strategy must therefore be thoroughly analyzed before execution for risk and reward.

In addition to the turtle trading rules and the actual experiment, traders are provided with quite a bit of helpful information and details based on their experiences. Second, it explains trader psychology in depth. 

Due to impatience or a lack of discipline, some traders failed to follow the rules. Even if people promise big trades, you could hardly argue that they find it difficult to follow the rules.

The turtle trading rules have been tested over the years. However, developing a strategy that fits the current market conditions and trends requires you to invent the wheel. 

However, some minor adaptations may be needed. Finally, the main idea is always the same - fear of loss, maximizing the risk-reward ratio and closing big trades with a profit.

Turtle traders can monitor stocks using what system?

The turtle system used the Trend-following indicator Donchian Channel. Traders using Turtle Channels usually monitor stocks for 20 days, during which the indicator is used. In the beginning, turtles traded during 20-day breakouts.

The trades would only be made if there was no trend from the previous breakout. The turtles believed that the next trend would be if a trend did not produce a trend. In the absence of the last breakout, traders thought they minimized risk.

To capture a more long-term trend in the markets, the 55-day Donchian channel indicator has been added. As a result, making a trade did not require waiting for a breakout to fail. Donchian Channels remain popular indicators.

Why use turtle trading rules?

To become a successful trader, we can learn from the turtle experiment and its original turtle trading rules. First, a system matters more than anything else; without clearly defined parameters for entry, exit, position-sizing, and stop-loss orders, a trader is merely following his gut instinct.

As a result, he will eventually use excessive position-sizing and overtrade.

Second, there is a lesson in psychology. Dennis did not address the student who had trouble following the rules.

Even though the rules have been remarkably effective, humans still have difficulty following the rules or leaving specific entries.

What are the top turtle trading trend indicators?

A moving average indicator is the Donchian Channel. It is just one type of trend indicator. Turtles can track and trade trends with these three popular trend indicators.

1. An indicator of moving averages is based on a specific time frame, such as 20 or 55 days. This indicator helps traders monitor trends by predicting past trends.

2. On a scale of 0 to 100, average directional indexes track trends. Stocks may show a promising trend if their value ranges from 25 to 100. Stocks with a value less than 25 indicate a weak trend.

3. The relative strength index identifies overbought signals. This indicator also determines price momentum. There are 0 to 100 points in the relative strength index. The indicator above 70 indicates that a stock is overbought. Stocks below 30 indicate underbought conditions.

Is turtle trading profitable?

Although the strategy offers benefits, it carries a high level of risk. Compared to other trading systems, turtle trading systems have deeper drawdowns. In addition, some breakouts tend to be false moves, thus limiting the trend-following turtle trading strategy.

This results in a large number of losses in trades. Historically, turtle trading systems have been profitable in about 40-50% of cases. However, investors should be aware of large drawdowns and their risks.

What can traders successfully use the turtle trading trend?

Although turtle trading has downsides, it can also have upsides for patient investors. The following four factors should be kept in mind by investors.

1. Trends should be taken slowly. It would be best to catch it right in the middle to follow a trend. Don't go into trending initially, and don't go into trending at the end.

2. Minimal position sizing is recommended. Each position should be small, especially in this volatile market. It is possible to reduce significant losses by risking only 1 or 2% of funds on a trade.

3. The key to success is diversification. Turtle trading requires diversification. From stocks to foreign exchange, turtle traders in the 1980s invested in various assets.

4. Turtle traders need an investment fund, not cash from Richard Dennis, to make money from trading turtles. Because turtle trading has low risk and small rewards, emerging turtle traders need a substantial nest egg to cushion the blow of losing trades, especially during market turbulence.

What questions should turtle investors ask?

Investors may be mentally prepared for trading, but research must be done first. Whenever turtle investors made a trade, they had to answer these questions. Likewise, investors who wish to become turtle traders should answer the following questions.

1. How is the market doing? It's just what the stock market is doing right now. Apple's share price is currently $140, so the market is in that state.

2. What is the market's volatility? The turtles watched the stock market every day as part of Dennis' risk management. A unit of volatility would be 1 N or $130-140 for Apple's stock if it fluctuated between $130 and $140. Apple's volatility would then be 10 N.

3. Who is trading the equity? First, the turtle trader needs to know how much the trader is trading. It would be possible to determine precisely how much they risk with each trade if they knew how much they had.

4. How would you describe the trading orientation? Turtle traders also had to know precisely how much money they had to buy and sell stocks, in addition to knowing how much money they had available. It prevented them from making irrational decisions. A turtle trader sticks to turtle trader rules and won't panic selling even if Apple stock plummets.

5. How risk-averse is the trader or client? Turtle trading relied on risk management. The turtle trader should invest no more than 1% or 2% in Apple stock if they have $1,000 to invest. Turtle traders minimized their losses by taking minimal risks.

Which markets are best for turtle trading?

Choosing a market to trade-in is your first decision. Trading turtles is a strategy of anticipating long-term trends and securing early entry into them on highly liquid markets. Unless you can find enough trading opportunities in liquid markets to find long-term trend changes, you will have to choose markets with short-term trend changes.

Forex has four currency pairs: AUD/USD, CAD/USD, EUR/USD, and GBP/USD. My favorites are interest rate derivatives, such as Eurodollar, T-Bonds, and 5-Year Treasury Notes. The best candidates in Metals are always Gold, Silver, and Copper.

To maximize your chances of success in turtle trading, choose a broad group of futures with a limited number of entry opportunities. These are some of my favorites, but others will do the trick if they're highly liquid. For example, my past trading experiences with Euro-Stoxx 50 futures have been excellent.

FAQs

Is turtle trading profitable today?

Turtle trading also makes about 40% profit in the currency markets due to fewer trends. However, on average, traders will suffer a 60% loss.

Why is Turtle trading called Turtle trading?

An experiment run by two famous commodity traders, Richard Dennis and Bill Eckhardt, in 1983 was dubbed Turtle as a nickname for a group of traders. When Dennis observed farm-grown turtles abroad during his travels, he named the participants' turtles about them.

Can Turtle Trading be used on stocks?

Managing risk well is the key to successful turtle trading. If they choose commodities and futures instead of volatile stocks, they are more likely to succeed. Investing successfully depends on the knowledge and psychology of the trader.

Bottom line

Trading psychology is a crucial skill for traders, which is why we talk a lot about it. It is, however, not easy. Turtle trading experiments are fascinating because they demonstrate that rules are essential, but adherence to them is also vital.

It can be disheartening to lose a string of small traders, but the market does not accommodate our every wish, and we must learn to accept that many good trades are stopped due to market movements.

The true professional trader will be able to ride out these periods of underperformance, and his profits will accrue over time if he correctly manages his losses and risk-reward ratio.