01. The success or failure of a trade depends on your personal determination and discipline.
And during low periods, whether you can continue to trade using the same method.
His method has two main features: trend following and long-term trading. These are also key principles in formulating the Turtle Trading Rules.
Richard Dennis later wrote down his trading rules and turned them into program trading.
◎ Trend Following
One of the key points of the Turtle Trading Rules is trend following. The belief in trend following is to trust that prices will continue. If the price is rising, you must believe it will continue to rise until it stops. If the price is falling, you must believe it will continue to fall until it stops.
For Richard Dennis, the two prerequisites for profit are risk management and trend following. These two prerequisites are the fundamental essence of the Turtle Trading Rules, and everyone should take notes or remember them carefully. Risk management and trend following are insights that Richard Dennis grasped when he entered the investment market at the age of 21.
◎ Choosing the Market
The first aspect of the Turtle Trading Rules is to choose the market. Before choosing a market, one should first observe what type of market the commodity trend belongs to. Richard Dennis categorized markets into four states: static balance, dynamic balance, static trend, and dynamic trend.
The difference between static balance and dynamic balance is that static balance has smaller fluctuations, while dynamic balance has larger fluctuations, but both ultimately consolidate. Static trend has smaller pullbacks, with the market clearly moving in one direction. Dynamic trend has larger pullbacks, but the market also moves in one direction. For those who do trend following and prefer long-term trades, static trend is a better choice. There aren't too many fluctuations, and the market is moving in the same direction.
For those doing counter-trend trading, they may prefer dynamic balance as it has larger fluctuations, making it more aggressive to guess tops and bottoms. Traders must first observe and choose a market suitable for their trading methods. Although trend followers can also trade dynamic trends, the larger pullbacks could lead to stop-losses being triggered.
◎ From a Probability Perspective, Not Predicting the Future
The second key point of the Turtle Trading Rules is to view things from a probabilistic perspective rather than predicting the future. During Turtle training, Richard Dennis first taught them the concepts of probability, money management, bankruptcy risk, and expected value, all of which relate to game theory. It is evident that the chosen students are individuals who understand probability, including accountants, gamers, poker players, etc. The biggest mistake in investment is believing one can predict the future.
◎ Trend Following, Entering with a Breakout System
The Turtle Trading Rules advocate entering trades primarily through trend following and using a breakout system. For example, entering when breaking above or below a range, with many methods available. These include the Donchian Channel system, ATR channel breakout system, Bollinger breakout system, as well as dual moving averages, triple moving averages, breakout of range highs and lows, among others.
In summary, they all use a breakout system for entry. Two commonly used methods are the Donchian Channel, which breaks the high or low of a 10-day or 55-day candlestick. The ATR channel breakout system uses three lines to form a price channel, going long when the price breaks above the upper channel and short when it breaks below the lower channel.
02. Entry and Exit Signals in the Turtle Trading System
The Turtle Trading System uses specific rules for entering and exiting trades. For example, to enter a long position (buy), traders will look for a 20-day price breakout, meaning the asset price should be higher than the highest price of the previous 20 days. Conversely, to enter a short position (sell), traders will look for a 20-day price breakdown.
In the Turtle Trading System, exiting trades is also rule-based. For example, traders use trailing stop orders to lock in profits and minimize losses. As market preferences change, this stop order will be adjusted to ensure profits are protected while allowing for growth.
Turtle traders are taught to trade within a complete trading system environment.
◎ Market - What to Buy or Sell
1. Turtle traders trade all major futures, cryptocurrencies, stock markets, precious metals, foreign exchange, and commodities.
2. Turtle traders trade multiple markets to achieve risk diversification.
◎ Position Size - How Much to Buy or Sell
1. The position size for Turtle traders is based on market volatility, using the 20-day exponential moving average of the true range (ATR).
2. Turtle traders are taught to gradually increase their trading position by 1% of the total account net worth.
◎ Entry - When to Buy or Sell
1. Turtle traders use the Donchian trend breakout system for trading, with System 1 entering on a breakout of the 20-day high and exiting on a breakdown of the 10-day low.
2. System 2 enters on a breakout of the 55-day high and exits on a breakdown of the 20-day low.
3. Add positions in a profitable trend.
◎ Stop Loss - When to Exit Losing Positions
1. As mentioned above, System 1 exits on a 10-day breakout in the opposite direction, while System 2 exits on a 20-day breakout in the opposite direction after entering.
2. The risk for any trade does not exceed 2% of the account asset net worth, and a corresponding stop-loss strategy is formulated.
◎ Strategy - How to Buy or Sell
1. Confidence, consistency, and discipline are the key factors for successful trading.
2. Turtle traders believe that successful traders use mechanized trading systems.
3. They only trade in liquid markets.
Turtle traders buy in strength, sell in weakness, manage risk, and follow their rules.
03. Risk Management and Position Size Strategy
There are two reasons why using the Turtle Trading System may fail. One is false breakouts, such as shorting on a false breakout that eventually moves in the opposite direction. Or a false breakout long, where the price moves against. In such cases, trading with a breakout system can easily lead to losses.
The other reason is significant pullbacks, which relate to the dynamic trend mentioned earlier. If the market pullback is too large, stop losses can be easily triggered, leading to substantial price increases afterward. Both situations are scenarios where breakout trading may incur losses. The way to improve is to use other entry methods.
The most important aspect of trading is money management and finding ways to survive in the market. Controlling trading losses aligns with the risk control of the 'Zurich Speculation Law.' Richard Dennis' approach is to keep a single loss within 2% of the principal, as he allows a maximum loss of 2 times the ATR. The same commodity can have a maximum of 4 positions, allowing for up to 3 additional entries.
The last point to emphasize is the addition strategy in the Turtle Trading Rules, which is one of the most refined skills. The essence of money management lies in the trade-off between the following two.
The first is to take on large risks and end up losing everything, forced to exit. The second is to take on very small risks, ultimately keeping a lot of cash, earning little even if the direction is correct. This is the concept of betting big versus betting small. People often wonder whether they should bet big or small. The answer is to rely on the addition strategy, using Jesse Livermore's method, which is also the addition method of the Turtle Trading Rules. We can achieve minimal risk while having substantial profits through this method.
One of the conditions for adding positions in Turtle Trading is to add when the price moves 1/2 ATR. For example, if a trading variety has a volatility of 2.5 and enters on a 55-day breakout at a price of 310, the first entry price is 310, the second entry would be 310 plus 1/2 times 2.5, making the price 311.25. The third entry would be 311.25 plus 1/2 times 2.5, making the price 312.5, and so on, with the fourth price being 313.75. Once the fourth position is fully loaded, no further additions will be made.
For such complex addition calculations, how can we further control risk? The answer is simple: first, set a stop loss upon entry, and when adding positions, move the original exit position to the original entry cost price. When adding the third position, move the exit position to the entry cost price of the second position, and so forth. This way, it ensures that if a loss occurs, it will only be from the last position, while previous positions can still exit profitably.
The Turtle Trading System adopts a 'fixed percentage position size' strategy for risk management. This means traders allocate a fixed percentage of their account balance to each trade. They typically take on 1%-2% risk per trade. Dennis aims to take on the maximum risk in trades with the highest probability.
By only taking on a small portion of the account's risk in each trade, traders can minimize the impact of losses and control overall risk. This method also allows them to leverage the effect of compounding, achieving greater returns as the account balance grows over time.
04. Diversification and Portfolio Management Techniques
Diversification is another important component of the Turtle Trading System. Traders are encouraged to diversify across different markets and asset classes to help spread risk and enhance overall returns. This may include trading various commodities, foreign exchange, and stock indices.
The Turtle Trading System also emphasizes the importance of portfolio management. By actively monitoring and adjusting positions, traders can ensure they are not overly exposed to any single market or asset class, keeping their portfolio balanced and aligned with their risk tolerance.
05. The Importance of Discipline and Consistency in Turtle Trading
Discipline and consistency are crucial for the success of the Turtle Trading System. Following rules and sticking to plans is essential, even during market turbulence or difficult trades. A steadfast adherence to the system enables traders to withstand market fluctuations and ultimately achieve success.
It is worth noting that the Turtle Trading System is not 100% reliable, nor is any system guaranteed to be profitable. However, by maintaining discipline and consistency, traders can increase their chances of long-term success. The key of the Turtle Trading System lies in creating a good risk/reward ratio in the direction of major market trends, managing risk, and maintaining discipline.
06. Adjusting the Turtle Trading System for Modern Markets
Although the Turtle Trading System was developed in the 1980s, its principles remain relevant today. However, traders may need to make adjustments to adapt to market conditions and technological changes. For example, the rise of algorithmic trading and high-frequency trading may require traders to adjust their entry and exit signals or add additional filters to avoid false breakouts.
Additionally, the emergence of new asset classes such as cryptocurrencies like Bitcoin provides more opportunities for diversification. Traders can also leverage modern tools and platforms to help manage their portfolios and execute trades more efficiently.
Conclusion
The Turtle Trading System is an engaging and historically successful trading method. It emphasizes trend following, risk management, diversification, and discipline, providing a solid foundation for any trader looking to navigate the unpredictable financial world. While the system may require some adjustments to fit modern markets, its core principles remain relevant and offer valuable insights for both beginners and experienced traders.
By understanding and applying the lessons from the Turtle Trading System, anyone can succeed in the trading world and seize important trends in the market.