Turtle Trading : Meaning, Rules, How Does it Work | Share India
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Richard Dennis was a well-known trader who achieved significant financial success in the early 1980s. He started with less than 5,000 and turned it into over 100 million. Wilhelm Eckhardt, Dennis' partner, thought Dennis' success was solely due to a unique talent. Dennis objected. Dennis followed a set of guidelines while trading. He believed anyone could become a profitable trader if they learned and adhered to his procedures. This is the turtle trading strategy. One can simply start Turtle Trading using trading software. Let's explore what turtle trading is.


What Is Turtle Trading? 


Turtle trading is a well-known trend-following tactic that traders employ to profit from ongoing momentum. It is applied in various financial markets and searches for breakouts on both the upside and downside.


Using a mechanical method that enables traders to adhere to rules rather than relying solely on "gut instinct" was Dennis's notion. A group of newbie traders received instruction in following the guidelines before being granted 1000000 each if they were successful.


The Turtle Trading Experiment


In contrast to Richard Donchian, who is credited with creating trend trading, Dennis is credited with popularizing turtle trading. Donchian developed the method in the 1960s with the following weekly trading rule: "Closing your short positions and making a purchase should be done when the price surpasses the high of the previous two calendar weeks (the ideal number of weeks varies for each commodity). Liquidate your long position and trade short if the price drops below the two-week low." Dennis refined the turtle trading technique, while Donchian devised a risk-averse trend trading approach.


6 Rules Of Turtle trading 


Here are the turtle trading rules.


Rule No. 1 Liquid Markets:


The turtles transacted the futures contracts and sought extremely liquid markets to trade without disrupting the market with a sizable transaction. The turtles sold bonds, the S&P 500, metals, energy, foreign exchange, and commodities.


Rule No. 2 Position-sizing Program:


The turtles used a position-sizing program to size their trades, which normalized the dollar volatility of the position by altering the transaction size depending on the market's dollar volatility. By guaranteeing that each stake was the same size for every need, this strategy aimed to enhance diversity. Markets with more significant liquidity trade fewer contracts, whereas markets with less liquidity trade more. The technique examined the 20-day exponential moving average of the genuine range to determine a market's volatility.


Rule No. 3 Distinct Entries:


There were two distinct entrance procedures. The first employed a short 20-day breakout, a high or low for 20 days, or a 55-day breakout. Up to four more entries might be added to the winning places. The turtles were instructed to take all available signals since failing to do so may cause them to miss a large opportunity, reducing their overall returns.


Rule No. 4 Prevent Losses:


The turtles were always instructed to employ stop losses to prevent excessive losses. Importantly, they decided on their stop loss before taking the position, outlining their risk before executing the trade. They avoided suffering significant losses in the same way as renowned trader Nick Leeson, who let his losses get out of hand. Wider stops were used in more turbulent markets to prevent getting "whipsawed" out of a deal.


Rule No. 5 Well-timed Exits:


Leaving a position too soon might significantly reduce the potential profit of that transaction. This is an error that trend-following systems frequently make. The turtles acquired trading strategies that included making several deals, just a tiny percentage of which resulted in significant profits. Several more were marginal losses. Whereas system two used a 20-day high or low, system one's exit criteria was a 10-day low for long positions and a 20-day high for short positions. Instead of using halt exit orders, they kept an eye on the price in real-time.


Rule No. 6 Market Strategies:


Last but not least, the turtles learned some specifics about utilizing limit orders and how to handle volatile markets, such as how to wait for quiet before placing orders rather than entering quickly and trying to acquire the "best" price, as so many rookie traders do. They were also instructed to take advantage of momentum by purchasing the strongest markets and selling the weakest.


Final Words 


The outcomes of the Turtle Trading experiment can be interpreted in a number of different ways. 


  • We could infer from the turtles' success that anyone can learn to trade.
  • We can witness Dennis' enormous losses and learn a lesson about trading tactics that are quite erratic. 
  • The experiment might demonstrate the variations between the 1980s and current markets.

Frequently Asked Questions (FAQs)

The turtle traders employed two easy entrance methods:
  • The 20-day breakout-based short-term system enters when the price rises over the previous 20-day high or falls below the previous 20-day low, they enter (one unit).
  • The 55-day breakout-based long-term system. As the price rose over the previous 55-day high, they bought (one unit).
    • Before the markets closed each day, the turtles would permanently close a transaction on the breakout.

The turtle traders always implemented a stop loss to prevent their losses from becoming out of control. All stop losses were calculated before the trade's entrance, and similar to their position sizing, they used various stops based on the market's volatility. Wider stops would be employed in more turbulent markets to prevent transactions from suffering possible losses before becoming profitable.

This trading technique can still be profitable by making the necessary adjustments to the process. Modern trading tactics frequently include risk control and trend-following. The highest drawdown on accounts is reduced. Turtle trading must be used with solid technical and fundamental analysis by traders. Also, the profitability depends on the market in which this strategy is used.
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