Trading with the Turtle strategy

Richard Dennis was one of the most famous traders of the 1980s. He believed that trading is a skill that can be learned and mastered. His partner William Eckhart thought otherwise. According to him, Dennis’ excellent results in trading were due solely to his talent. It was then that he came up with the Turtle trading strategy.

The Turtle experiment

In 1983, Dennis decided to resolve the debate by running what has now come to be known as the Turtle experiment. Denis himself trained the participants in the experiment for two weeks. He taught them how to execute a trend-following strategy which has now come to be known as the Turtle trading strategy. 

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Dennis called his students “turtles” because he was confident he could teach them how to trade and help them grow as efficiently as turtle farmers in Singapore.

It was not difficult for Dennis to find participants for the experiment. People flocked for the chance to learn trading from one of the masters. No one knew the selection criteria, but 14 “turtles” were handpicked for the first cycle.

What is the Turtle trading strategy?

Turtle trading is based on buying a stock/contract during a breakout and selling fast on a pullback/drop in price. It looks for breakouts to both the upside and downside.

Denis wanted to create a mechanical strategy where traders did not rely on “gut” but followed specific rules. Participants in the experiment were trained to abide by these rules, and if they succeeded, each was given real money to manage.

The “turtles” were taught how to apply a trend-following strategy in trading. Its essence was that “the trend is your friend”. Traders were encouraged to buy futures breaking out to the upside of trading ranges and sell short downside breakouts. For example, it meant using new four-week highs as an entry indicator in practical trading.

Turtle trading strategy rules

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Dennis kept the details of his rules a secret for many years, and several copyrights now protect them. In The Complete Turtle Trader: The Legend, the Lessons, the Results (2007), the author Michael Covel provides some insights into some of the  rules:

  • Make trading decisions by analyzing prices instead of relying on information from commentators on television or newspapers commentators.
  • Personalize your trades. Keep some flexibility while setting the parameters of your buy and sell signals. Try different parameters in many markets to find out what works best from your perspective.
  • Plan your exit along with your plan for your entry. Set your stop loss before entering a position, so it is evident when you will collect your profits. It helps decrease losses.
  • Calculate the volatility of each of your trades and use this to decide your position size. Hold larger positions in less volatile markets and reduce your exposure to the most volatile markets.
  • No matter how lucrative a trade may seem, never risk more than 2% of your holdings on a single trade.
  • Along with significant returns, also get comfortable with losses of the same size.

Note! Turtle is a renowned trend-following trading strategy used by traders to take advantage of sustained momentum.

Did the Turtle trading strategy work?

According to a former “turtle”, Russell Sands, the two classes of turtles personally trained by Dennis collectively made a significant amount over the next five years. Dennis made his point and proved that anyone could learn to trade. According to Sands, the system is still working.

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Each trader can incorporate the rules of the Turtle strategy into their trading. Its essence is to buy breakouts and sell quickly on a price fall or reverse. Under this system, the same principles are used to make short trades as every market experiences both uptrends and downtrends. Any timeframe can be used for an entry signal; however, the exit signal must be shorter to maximize profitable trades.

However, despite the performance of the Turtle trading strategy, its disadvantages are as significant as the advantages. The system relies heavily on breakouts, most of which tend to be false moves, resulting in many losing trades. Thus, you should expect to be correct only 40%-50% of the time.

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The Turtle soup trading strategy

The Turtle strategy came with the risk of losses on false breakouts. To counter this, Linda Bradford-Raschke came up with a revised version called the Turtle soup trading strategy.

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The buy signals dictated by the strategy are:

  • The price hits a new 20-day low. The lower the price falls below the previous low, the higher the forecasted risk/reward is for this signal. 
  • The last 20-day low in price should have happened at least four days ago on the daily chart.
  • An entry must be approximately 5-10 cents higher than the last 20-day low. It is a good signal that the price has reversed and is not going to trend lower. The entry into the trade must be made within a day after the signal is detected.
  • A stop-loss level should be set while making the entry into the trade. This level should be just a couple of cents lower than the day of entry.

The short-selling signals of the strategy are:

  • The price hits a new 20-day high. The higher the price rises above the last high, the higher the predicted risk/reward is for this signal. 
  • The last 20-day high should have happened at least four days ago.
  • A short-selling entry must be 5-10 cents below the last 20-day high. It strongly indicates that the price has reversed and will not trend higher. Again, the entry signal is valid only for one day.
  • A stop-loss level should be set a couple of cents over the high of the day of entry.

 Linda Bradford-Raschke shared her vision for trading in her book, Street Smarts: High Probability Short-Term Trading Strategies. You can also buy it from the online store and download it in PDF to learn more about the Turtle soup trading strategy.

The bottom line

Many traders use the Turtle strategy when trading Forex or on the TradingView platform. It was created to demonstrate that even beginners can trade with proper training. The main lesson of this experiment is that trading should not be based on emotions or intuition. A well-thought-out strategy is necessary to reduce the risks of a wrong prediction and ultimately profit from the trade.

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