Turtle Trading is one of the most illustrious trading strategies created in the 1980s, built on the principles of trend following. The results from this strategy showed that any person with the right set of rules and discipline could make it in the markets, regardless of experience. With trends followed, combined with the risky nature of their risk management techniques, Turtle Trading has been used as a symbol of systematic and disciplined trading. This article explores the origins, principles, and modern-day application of Turtle Trading.
Trading was born from a legendary experiment in two famous traders, Richard Dennis and William Eckhardt. Dennis believed that trading could be taught to someone, while Eckhardt remained skeptical; this is because, according to him, great traders were born not made. To settle the argument, they had a group of nascent traders undergo their developed rules in training. These traders were called "Turtles" and were motivated by Dennis's visit to a turtle farm in Singapore, where he believed that he could raise traders just like the farmer raises his turtles.
The experiment was a phenomenal success. Turtles, using this simple set of rules taught, produced good profits. The success of Turtle Trading demonstrated that following a systematic trading strategy would bring consistent profits.
Turtle Trading is based on several key principles that are all rooted in both the elements of trend following and risk management. The main principles include:
Trend Following: Turtles were taught to follow long-term trends. The strategy involved buying when prices were high and selling when prices were low, rather than attempting to predict market tops or bottoms. This principle follows the logic that trends tend to persist longer than expected.
Risk management: Probably the most important element of Turtle trading is the stringent control of risk. The Turtles were taught to size their trades relative to volatility so that no solitary trade could have that catastrophic effect in their portfolio. Therefore, when it lost, the loses were capped while the wins could run wild.
Entry and Exit Rules: The strategy provided entry and exit rules strictly based on price breakouts. The Turtles would enter a position whenever the price had a breakout above a pre – determined level and then exit when it went in the opposite direction, preventing the things emotionally that had influence over trading decisions.
Discipline: Discipline is the heart of Turtle Trading. The Turtles were to stick strictly to the system, which was expected to be strictly adhered to without deviating from the rules in any kind of market condition.
How the Turtle Trading Strategy Works
The Turtle Trading strategy stipulates strict sets of rules for entry and exit.
Entry Signals: Turtles would long positions when the price of the financial instrument broke above the highest price of the previous 20 or 55 days. They would short sell the instrument whenever the price broke below the lowest price of the previous 20 or 55 days. Such a breakout signified a beginning trend.
Position Sizing: Turtles used something called N position sizing, that is volatility-based. The more volatile the asset, the smaller the size of the position. This helped cap the risk in high volatility markets.
Exit Signals: The system was brought with exit rules. Turtles would exit their positions if the price reversed by some percentage or fell below some level depending upon the length of trend they were following. This ensured that the losses were reduced and permitted profits to grow as long the trend kept lingering on.
Diversification: The Turtles were taught to trade in a range of markets starting from commodities to currencies, stocks, and bonds. This act of diversification helped reduce the risk while maximizing profit opportunities.
Although the idea of Turtle Trading began its victory ride in the 1980s, its concepts work really well in modern times. Most professionals and hedge funds apply a variation of the fundamental concept of trend following. That is, however, said with a note that with more advanced tools for technical analysis and with higher-frequency trades, markets have evolved a bit, and a pure version of Turtle Trading might not work as well without fine-tuning.
But the spirit of risk management, discipline, and systematic trading remains true to this day. The modern trader who understands and puts these ideas in practice can still be successful, even though the specific rules need to adapt to the faster pace and greater volatility of today's market.
Turtle Trading proved that trading could be taught and success was possible from a disciplined, rules-based approach. The trend-following, risk-managed, systematic execution focus of the strategy has built a legacy in the trading world which transcends time as markets change. Whilst markets have evolved, the foundational principles of Turtle Trading remain of value to traders who seek to remove emotion from their decision-making and to follow the trends driving market profits.