Turtle Trading Rules: A Comprehensive Guide

The Turtle Trading system is a famous trading strategy that was developed by Richard Dennis and William Eckhardt in the early 1980s. The system was based on the idea that trading rules could be taught to anyone and that successful trading could be replicated with a set of clear, systematic rules. Here’s a comprehensive guide to understanding and implementing Turtle Trading rules.

1. Background of Turtle Trading
The Turtle Trading experiment began when Richard Dennis, a successful trader, bet his colleague William Eckhardt that he could teach anyone to trade successfully if they followed a set of rules. Dennis recruited a group of people with little to no trading experience and taught them his trading system. These "Turtles" achieved impressive results, demonstrating that trading could be learned and mastered through disciplined adherence to a set of rules.

2. Core Principles
The Turtle Trading system is based on several core principles:

• Trend Following: The system relies on the belief that markets move in trends, and that these trends can be identified and exploited.
• Systematic Trading: Turtle Trading involves following a strict set of rules without letting emotions interfere.
• Risk Management: Managing risk is crucial. The system emphasizes proper position sizing and setting stop-loss orders to protect capital.

3. Key Components of Turtle Trading

A. Entry Rules

• Breakout System: Turtles use a breakout strategy to enter trades. A breakout occurs when the price moves beyond a defined level, such as a recent high or low.
• Entry Signals: Specific rules determine when to enter a trade, usually based on a breakout above or below the 20-day or 55-day moving average.

B. Exit Rules

• Stop-Loss Orders: Turtles use stop-loss orders to limit potential losses. These are placed at a certain distance from the entry price, based on historical volatility.
• Profit Targets: The system also includes rules for taking profits, often using trailing stops to lock in gains as the trend continues.

C. Position Sizing

• Volatility-Based Sizing: Position sizes are determined based on the volatility of the market. Higher volatility requires smaller positions to manage risk effectively.
• Fixed Fractional Method: The Turtle Trading system uses a fixed fractional method to determine how much of the total capital should be risked on each trade.

4. Risk Management
Proper risk management is crucial in the Turtle Trading system. Key strategies include:

• Diversification: Spreading investments across different markets or instruments to reduce risk.
• Stop-Losses: Implementing stop-loss orders to exit trades that move against the position.
• Capital Allocation: Allocating capital to various trades in a way that ensures no single trade can significantly impact the overall portfolio.

5. Example of Turtle Trading Rules

Rule	Description
Entry Rule 1	Buy when the price exceeds the 20-day high.
Entry Rule 2	Sell when the price falls below the 20-day low.
Exit Rule 1	Use a stop-loss at 2 times the Average True Range (ATR) below the entry price.
Exit Rule 2	Exit when the price crosses below the 10-day moving average.
Position Sizing	Risk 1-2% of total capital per trade.

6. Advantages and Disadvantages

Advantages

• Objective Rules: The system provides clear, objective rules that reduce the impact of emotions.
• Historical Success: It has demonstrated success over various market conditions.
• Adaptability: The system can be applied to various markets and instruments.

Disadvantages

• Discipline Required: It requires strict adherence to rules, which can be challenging for some traders.
• Potential for Drawdowns: Like any trading strategy, it can experience periods of losses, particularly during non-trending markets.
• Complexity: The system’s rules and calculations can be complex and may require significant effort to implement correctly.

7. Implementation Tips

• Backtesting: Before applying the Turtle Trading rules, backtest them on historical data to ensure they work with current market conditions.
• Paper Trading: Practice the rules in a simulated environment to build confidence and refine your strategy.
• Continuous Learning: Stay updated with market conditions and continuously evaluate and adjust the trading strategy as needed.

Conclusion
The Turtle Trading system offers a systematic approach to trading that emphasizes trend following and disciplined risk management. By adhering to its rules and maintaining a rigorous approach, traders can potentially achieve success in various market conditions. As with any trading strategy, it is essential to understand the system thoroughly and be prepared for both the advantages and challenges it presents.