The Turtle Trading system is a well-known trend-following strategy developed in the 1980s by commodities trader Richard Dennis. Dennis wanted to prove that successful trading could be taught, leading to the famous “Turtle Traders” experiment. The strategy uses specific rules based on technical analysis to dictate entry, exit, and risk management. Here’s an overview of the core Turtle Trading rules:

1. Market Selection

  • Trade in markets with high liquidity and volatility, as these conditions are conducive to trend formation and continuation.

2. Position Sizing

  • Risk only 1-2% of total equity on a single trade to manage risk effectively.
  • Use the concept of “N” (the 20-day exponential moving average of the true range) to adjust position size based on market volatility.

3. Entries

  • Enter a long position when the price exceeds the high of the last 20 days.
  • Enter a short position when the price falls below the low of the last 20 days.
  • This breakout approach aims to ensure that traders are always positioned in the direction of the trend.

4. Stops and Exits

  • Place an initial stop loss at 2N below the entry point for long positions and above for short positions.
  • Exit the trade if the price moves 2N against the position, indicating a potential trend reversal.

5. Additions (Pyramiding)

  • Add to a position (pyramid) in ½ N increments only if the trade is profitable, up to a maximum of 4 units.
  • Each addition should be made at a price movement of ½ N in the direction of the trend.

6. Exits

  • Exit long positions when the price falls below the 10-day low and short positions when the price rises above the 10-day high.
  • This rule ensures that traders can capture the bulk of the trend.

7. Risk Management

  • Adjust the trading unit size as account equity changes.
  • Limit the total exposure of correlated markets to reduce risk.

8. Diversification

  • Trade across a range of uncorrelated markets to spread risk and increase the potential for profit.

9. Discipline

  • Follow the rules consistently, without prediction or subjective judgment.
  • The success of the Turtle Trading system relies heavily on discipline and the ability to follow the rules without letting emotions get in the way.

The Turtle Trading system is designed to be mechanical, removing emotional decision-making from the trading process. It has been historically successful in various markets, including commodities, stocks, and currencies. However, like any trading strategy, it’s not foolproof and requires proper understanding, strict adherence to the rules, and sound risk management to be effective.