The Turtle Trading Strategy is one of the most famous trend-following trading systems, developed by legendary traders Richard Dennis and William Eckhardt in the early 1980s. The strategy was designed to prove that anyone, with the right rules and discipline, could be taught to trade successfully. The Turtles, a group of novice traders, were trained by Dennis and Eckhardt to follow a strict set of rules, which became the basis of the Turtle Trading strategy. Over time, the strategy generated impressive returns, cementing its place in trading history.

The core principle of the Turtle Trading Strategy is to follow the trend by using breakout systems and risk management rules to capture long-term market trends. By using a set of predefined rules, the strategy removes emotional decision-making and aims to profit from large market moves in trending markets.

Core Principles of the Turtle Trading Strategy

1. Trend Following:
   • The Turtle Trading strategy is based on the principle of trend following. It assumes that once a trend is established, it is likely to continue in the same direction for a significant period. Therefore, the strategy focuses on identifying trends early and riding them until they reverse.
2. Breakout System:
   • Turtles were taught to trade breakouts from well-defined price ranges. By entering trades at the point of breakout, the strategy attempts to capture large moves in the direction of the trend.
   • The entry signal comes when the price breaks above a defined resistance level (for a long position) or below a defined support level (for a short position).
3. Risk Management:
   • One of the most important aspects of the Turtle Trading strategy is its strict risk management rules. Turtles risk only a small percentage of their capital on each trade (typically 1-2%), using a system known as position sizing to control risk. This ensures that even if multiple trades are unsuccessful, the overall account balance remains protected.
4. Trend Identification:
   • The Turtles used moving averages and breakout channels to identify trends. The strategy focuses on entering trades when prices break beyond a specific range, confirming that the trend has been established.
5. Discipline and Consistency:
   • The success of the Turtle Trading strategy lies in its discipline and consistency. The system emphasizes following the rules strictly and avoiding the temptation to make discretionary decisions. Turtles were taught to trade without emotions, adhering to predefined entry, exit, and risk management rules.

Key Components of the Turtle Trading Strategy

1. Entry Signals (Breakouts):
   • The Turtles used two primary breakout methods to enter the market:
     • 20-Day Breakout: The first method involved entering a position when the price breaks above the highest high or below the lowest low of the last 20 days. This signal indicates that the currency pair is in a strong trend.
     • 55-Day Breakout: A second, more conservative entry signal was based on a 55-day breakout, used for longer-term trends. This is typically used when a trader wants to enter a trade after confirming a trend with more price data.
   • The strategy prioritizes breaking the recent highs (for a long position) or recent lows (for a short position), based on the idea that prices will continue to move in the direction of the breakout.
2. Position Sizing and Risk Management:
   • The Turtles used a unique position-sizing strategy to control risk. They were taught to risk only a small percentage of their capital (usually 1-2%) on each trade. The position size was determined by the volatility of the market (measured by the Average True Range or ATR) and the trader’s account size.
   • The Turtles calculated how many contracts or positions to take based on the volatility of the market. The higher the volatility, the smaller the position size to ensure the risk was consistent with their rules.
3. Exit Signals:
   • The Turtles used two primary exit strategies:
     • Breakout Reversal: The first exit strategy was based on a reversal of the initial breakout. If the price moved against the trend and broke the opposite range (for example, a 10-day low for a long position), the position was closed.
     • Trailing Stop: The second exit strategy involved trailing stops to lock in profits as the market moves in the trader’s favor. The trailing stop was typically set at a multiple of the market’s volatility, moving up (or down) as the price moved in the direction of the trend.
   • The idea behind using trailing stops was to let profits run during strong trends while cutting losses quickly during trend reversals.
4. Position Limits:
   • The Turtles had specific position limits based on market conditions. For example, they would not allow a position to grow too large relative to their capital. If the market became overly volatile or risky, the Turtles were taught to scale back their positions.
5. Diversification:
   • The Turtles traded multiple markets simultaneously to diversify their risk. They did not focus on a single currency pair but traded a basket of different assets, including currencies, commodities, and stock indices. This diversification helped spread the risk and provided more opportunities to capture trends across different markets.

Key Rules of the Turtle Trading Strategy

1. Trading Breakouts: Enter positions when price breaks above the 20-day or 55-day high (for long positions) or below the 20-day or 55-day low (for short positions).
2. Risk Management: Risk no more than 1-2% of the total capital on any single trade, using position sizing based on volatility.
3. Trend Confirmation: Only enter a trade if the market is trending. Use moving averages and breakout levels to confirm that the market is in a strong trend.
4. Exit Strategy: Use trailing stops or exit positions when the price moves against you (breaking the opposite range or a specific number of ATR away from the entry point).
5. Position Limits and Diversification: Limit the size of positions to avoid excessive exposure, and trade a diversified portfolio of assets to spread risk.

Advantages of the Turtle Trading Strategy

1. Systematic and Rule-Based: The Turtle Trading strategy is completely systematic, making it easy to follow and removing emotional decision-making from the process. Traders follow a clear set of rules for entering and exiting positions.
2. Risk Management: With a strict risk management system, the strategy protects the trader’s capital by controlling how much is risked on each trade.
3. Trend-Catching Potential: The strategy is designed to catch long-term trends, which can be highly profitable if the market is trending strongly in one direction.
4. Adaptable Across Markets: The Turtle Trading strategy is flexible and can be applied to any market, including currencies, commodities, and stock indices.

Disadvantages of the Turtle Trading Strategy

1. Requires Patience and Discipline: The Turtle strategy requires significant patience and the ability to stick to the rules. Since it often involves riding long-term trends, it can be mentally taxing for traders who are used to short-term trading.
2. False Breakouts: The breakout system can lead to false signals, especially in choppy or sideways markets. A currency pair may break out only to reverse soon after, leading to potential losses.
3. Lagging in Volatile Markets: The strategy can be slow to react to sudden market changes. In volatile or rapidly changing conditions, the strategy may result in trades being executed too late.
4. Risk of Large Drawdowns: As the strategy rides trends, it can endure significant drawdowns during periods of market corrections or trend reversals. This can be emotionally challenging for traders, especially if they do not manage risk properly.

Practical Example of Turtle Trading Strategy

Let’s say the EUR/USD pair is in a strong uptrend. The 20-day high breaks, triggering a long entry signal. You risk only 1% of your capital on this trade. Based on the volatility of the pair (calculated using Average True Range (ATR)), you determine the proper position size. As the trade moves in your favor, you use a trailing stop to lock in profits, allowing the position to run as long as the trend continues. If the price moves against you and breaks the 20-day low, you exit the position to minimize losses.

FAQs

What is the Turtle Trading strategy?
The Turtle Trading strategy is a trend-following system that involves trading breakouts, using strict risk management rules, and riding long-term trends. It was developed by Richard Dennis and William Eckhardt in the 1980s.

How does the Turtle Trading strategy work?
The strategy works by identifying strong price breakouts (either up or down), entering positions based on a predefined breakout range, and managing risk with specific position sizing and stop-loss rules.

What are the key rules of the Turtle Trading strategy?
Key rules include trading breakouts, managing risk by limiting position size, using trailing stops to lock in profits, and exiting when the market moves against the trend.

Is the Turtle Trading strategy suitable for beginners?
While the strategy is systematic and rule-based, it requires patience and discipline, which might be challenging for beginners. However, it is an excellent learning tool for understanding trend-following principles and risk management.

Can the Turtle Trading strategy be applied to forex?
Yes, the Turtle Trading strategy can be successfully applied to forex markets. It works well in trending markets, which is often the case in currency pairs with strong economic fundamentals or clear geopolitical trends.