Turtle trading is a popular trading Strategy that has been used by many successful traders. Developed by Richard Dennis and William Eckhardt, Turtle trading is a trend-following approach to trading that uses strict rules to enter and exit trades. They sought to demonstrate that, by adhering to a set of guidelines, anyone could learn to trade successfully. 

To test their system, they hired a group of inexperienced traders, they called them turtles, trained them, and then watched them succeed. It's easy to understand and implement, and it could be used in various markets. 

This article covers the basic principles and rules of turtle trading and how turtles used this strategy to make profitable trades. Read on to learn more about how turtle trading was so successful.

What is Turtle Trading?

Turtle Trading is a popular trading strategy that was developed by legendary trader Richard Dennis in the 1980s. The strategy is based on trend-following principles and is designed to help traders identify and capitalize on long-term market trends. The idea behind Turtle Trading is that by following a set of simple rules, traders can achieve consistent profits over time. 

The name "Turtle Trading" was inspired by the idea that a turtle moves slowly but steadily towards its goal and that traders should adopt a similar patient and disciplined approach to trading. Some of the key principles of Turtle Trading include using technical analysis to identify trends, using a set of specific entry and exit rules, and managing risk through careful position sizing and stop-loss orders. 

The Turtle Trading system 

The Turtle Trading System has two parts - System 1 and System 2. 

System 1 is based on moving averages. It uses a 20-day and 55-day moving averages to identify trends and trading signals. When the 20-day moving average crosses above the 55-day moving average, it is a buy signal. When the 20-day moving average crosses below the 55-day moving average, it is a sell signal. This system is designed to capture the big trends in the market. 

System 2 is based on a breakout system. It uses a 20-day and 55-day price channel to identify breakouts. If the price breaks out above the 55-day high, it is a buy signal. When the price breaks below the 55-day low, it is a sell signal. This system is designed to capture the trends in the market that are not captured by System 1. 

Both System 1 and System 2 are designed to be used together. By using both systems, traders can capture both the big trends and the smaller trends in the market. The Turtle Trading system is a proven system that has been used by many successful traders. 

While Turtle Trading can be a powerful trading strategy, it is important to note that it takes time and patience to master. As with any trading strategy, it cannot be a guarantee of success, and traders should always be prepared to adapt their approach based on changing market conditions.

The Basic Principles of Turtle Trading

The strategy is based on the idea that markets are not completely efficient and that trends can be identified and exploited. The principles of turtle trading are based on a set of rules that are designed to help traders identify trends and take advantage of them. 

Follow Trend

The first principle of turtle trading is to identify the current market trend. To do this, traders use technical analysis to identify patterns in the market. Once a trend has been identified, traders will enter a position that aligns with the current trend. 

Using Stop loss

The second principle of turtle trading is to use stop-loss orders to protect against losses. Traders will place stop-loss orders at a predetermined level to limit their losses if the market goes against them. 

Position Sizing

The third principle of turtle trading is to use position sizing to manage risk. Traders will allocate a percentage of their portfolio to each trade based on the size of their trading account and the risk associated with the trade. Finally, the fourth principle of turtle trading is to be patient and disciplined. Turtle traders understand that the market is unpredictable and that there will be times when trades do not work out. 

Risk management

The Turtle Trading System's emphasis on long-term price action is one of the main factors contributing to its success. It is not slowed down by short-term changes in the market. However, by sticking to their rules and being patient, turtle traders can take advantage of trends and achieve long-term success in the market.

Any trading strategy must effectively manage risk, and the Turtle Trading strategy is no different. To control risk, it applies a "fixed fractional position sizing" technique. This means that traders set aside a specific portion of their account value for each trade. On every deal, they would normally risk less than 2% of their account. Traders can reduce the impact of losses and control total risk by simply risking a tiny fraction of their account on each trade. With this strategy, they can also benefit from the power of compounding as their account balance increases over time.

Portfolio Management

Diversification and portfolio management are two of the most important concepts in trading, and the Turtle Trading System is no exception. In trading, it is essential to have a diversified portfolio, as it helps to minimize risk and maximize returns. 

A diversified portfolio spreads the investments across different types of assets, such as stocks, bonds, commodities, and currencies, rather than just focusing on a single asset class. This way, even if one asset class is underperforming, there are still other assets that would generate returns. 

The Turtle Trading System emphasizes the importance of diversification, and it also outlines specific rules for portfolio management. One such rule is to never risk more than 2% of the account on any single trade. 

Another important rule for portfolio management is to manage the winners and losers differently. The Turtle Trading System allowed the winners to hold on to their winning trades for as long as possible to maximize their profits. On the other hand, allowed to cut the losses short by adhering to the stop-loss orders. This way, turtles were able to minimize their losses and protect their account from large drawdowns. 

Disciplined Trading

The Turtle Trading System's effectiveness depends on discipline and consistency. Even in volatile markets or when deals aren't doing well, adhering to the rules and the plan is crucial. With discipline in Trading strategy, turtles could successfully weather the market's ups and downs because of their uncompromising commitment to the method.

It's important to remember that neither the Turtle Trading System nor any other method can ensure success. However, turtles could improve their prospects of long-term success by remaining consistent and disciplined. Incentivizing risk-to-reward ratios corresponding to the direction of the primary market trend was by the Turtle trading system, together with risk management and discipline.

The Rules of Turtle Trading

The first rule is to trade following the direction of the market trend. The turtles always traded in line with the current market trend. 

The second rule is to use a breakout strategy. This means that turtles would buy when the price breaks above a key resistance level, or sell when the price breaks below a key support level. 

The third rule is to use a position-sizing strategy that is based on the volatility of the market. This allowed turtles to increase their position size when the market is more volatile, and decrease their position size when the market is less volatile. 

Another important rule of turtle trading is to always use a stop-loss order. This is a protective order that will automatically exit the trade if the price moves against the trade. This is an essential part of risk management and can help avoid large losses. 

The rules of turtle trading are simple, yet effective. By following these rules, turtles could increase their probability of success in the markets. However, it is important to remember that no trading strategy is perfect, and one should always be prepared for losses.

Implementing Turtle Trading Strategies

Implementing Turtle Trading strategies can be a great way for beginners to get started with trading. However, it's important to note that the Turtle Trading strategy is a long-term approach, as opposed to a get-rich-quick scheme. 

The first step in implementing this strategy is to define the entry and exit points. This means determining what price turtles could enter the market, as well as when they could like to exit. Once they had these points defined, they would then set up stop-loss orders. 

Stop-loss orders are used to limit the losses in case the market moves against the trade. It's important to use stop-loss orders to protect the capital and limit the risk. 

The next step is to diversify the portfolio. This means investing in a variety of different assets to reduce the overall risk. Turtle Trading System provides specific rules and guidelines to help traders achieve these goals. By following these rules and implementing a diversified portfolio strategy, traders were able to increase their success rate in the markets.

Entry And Exit Strategy In The Turtle Trading System

As it is a trend-following system, the Turtle Trading System is based on the principle of trading breakouts. The system uses a combination of entry and exit signals to identify potential trading opportunities. In this section, we will look at the entry and exit signals that traders used.

Entry Signals

The entry signal is based on the price action of the underlying asset. The system looks for breakouts in the price action, indicating a potential trend reversal. When the price breaks above or below a certain level, it triggers a buy or sell signal. The Turtle Trading System uses a 20-day channel breakout as its entry signal. 

The Turtle Trading System involved the use of entry and exit signals to buy and sell securities. In this system, entry signals are generated by the breakout of price levels. When the price breaks out from a certain level, it is considered an entry signal to trade in a security. This breakout level is determined by calculating a specific percentage of the price range over a certain period, typically 20 days. 

Once an entry signal is generated, the Turtle Trading System additionally uses a stop-loss order to limit potential losses. This stop-loss order is placed at a predetermined percentage below the entry price. It also incorporates a system of pyramiding into winning trades. This means that if the price continues to move in favoring the trade, additional positions are added to the original trade, thereby increasing the potential profit. 

Exit Signals

The exit signal in the Turtle Trading System is equally important. The system uses a trailing stop to protect profits and exit trades. The stop loss is placed at a certain percentage or dollar amount below the entry price. The stop loss is then adjusted for every subsequent high or low in the market, allowing for potential profits to be locked in as the trend continues. 

The exit signal is generated when the price reaches a specific target level. This target level is calculated as a percentage of the price range over a certain period, typically 10 days. Once the price reaches this level, the trade is closed, and profits are taken. 

Overall, the Turtle Trading System is a well-defined and disciplined trading strategy that is designed to take advantage of trend-following opportunities. It relies on entry and exit signals, stop-loss orders, and pyramiding to maximize profits while minimizing potential losses. 

By following the rules of the system, traders can potentially achieve long-term success in the markets. However, it is important to consider that like any trading strategy, the Turtle Trading System is not foolproof and requires proper risk management and discipline to achieve success.

Is Turtle Trading Strategy relevant in modern markets?

Although the Turtle Trading System came into existence in the 1980s, it is still relevant today with certain changes that are required for current markets and technological advancement. That stated traders might need to make adjustments to take into account changes in the market and technology. Modern markets are highly volatile and cause sharp fluctuations resulting from even markets and even news updates. Traders may also need to refine their entry/exit strategy to add new filters to prevent erroneous breakouts.

More chances for diversification are made possible by the advent of new asset classes like cryptocurrencies. Modern platforms and tools can be used by traders to better manage their portfolios and carry out trades.