The turtle trading strategy is one of the most famous in forex trading, including the trend following trading strategy.
In the days of Richard Dennis and William Eckhardt carried out the famous experiment with Turtle trading. Maybe many experienced traders are familiar with Richard Dennis who is one of the inspirations for world traders because of his success in turning a $5000 initial investment into more than $100 million.
When you come across this article, you might be interested in reading it further. Because it will explore and trace the turtle trading strategy.
Maybe the fate of each trader is not the same as Richard Dennis, but by taking his thoughts and enthusiasm, his success can be contagious to all traders.
What is a turtle trading strategy?
We try to reminisce about the history of the turtle trading strategy. In 1983, two well-known stock traders Richard Dennis and William Eckhardt conducted an experiment they called the Turtle trading experiment.
In this case, Richard Dennis calls turtles in an experiment because he watches the turtles on his farm grow and travel abroad. He argues that trading is a knowledge that can be taught, and not an innate talent. Richard believes that like turtles on his farm, successful traders can raise up just like turtles on his farm.
While Eckhardt has a different opinion, that trading is an innate talent, it cannot be taught.
The turtle trading experiment aims to determine whether trading is an innate talent or something that can be taught.
Here is the Turtle trading strategy in which turtle is the nickname of a group founded by Richard Dennis and William Eckhardt, whose members are people involved in the experiment.
The two famous traders taught turtle trading to participants who were novice traders. The results of the experiment resulted in successful traders with positive results from all participants. And some of the turtle trading strategies are still used it to this day.
Turtle trading is the most popular experiment
The experiment carried out by the two well-known traders became the most famous history in the financial world because it produced a return of more than 80% over the year.
In the experiment, Richard Dennis and Eckhardt received 1000 applications. Then they took 10 turtle participants and summoned them to Chicago for two weeks of training.
After the training, the participants were provided with an account and trading capital. And surprisingly they managed to increase their capital by more than 80% the following year.
This means that the experimental results from the Turtle experiment are that trading is something that can be taught.
The next conclusion from the disagreement between Richard Dennis and Eckhardt. The match opinion of Richard Dennis agrees, is that trading can be taught and not an innate talent.
However, the turtle experiment also received criticism. Because of the 1000 participants, only 10 were taken, this was a question of criteria in deciding the participants.
Criteria finding turtle
In the experimental program, Dennis asked questions to find participants. No one knows the exact criteria for Dennis, but some of the questions are true or false, which include the following;
- Big profits are made after finding a long position on the low after a big downtrend.
- It doesn’t help to see every trade quote in the market.
- Many other opinions on the market are good to follow.
- With a capital of $ 10,000 only risking $ 2500 per trade.
- At initiation, it should know exactly what to liquidate when a loss occurs.
From the true or false question, according to a turtle, the correct answers are questions 2,4, and 5, while numbers 1 and 3 are false.
Rules of turtle trading
The original complete turtle trading system is very complicated, but there are some important points that can be taken as the essence of turtle trading.
- Markets. What to buy or sell.
- Measure position. How much will buy or sell?
- Entries. When to buy or sell.
- Stops. When to exit at loss.
- Exits. When to exit on winning trades.
- Tactics. How to buy and sell.
The original turtle trading strategy was for commodity trading in Chicago. Maybe you find this strategy is sold out there at a high price.
Beware, this trading strategy is revealed for free by Dennis which can be found in the Original Turtle Rules. Those out there who sell in the name of turtle trading strategy, have never even used this strategy and they only make money selling trading systems.
The following rules turtle trading strategy
These turtle trading rules refer to the blog of Rayner Teo, a well-known independent trader.
- Entries. Open long when the price is above the high 20 days.
- Stop losses. 2 ATR from price entry.
- Risk management. 2%.
- Trailing stops. 10 days low.
- Entries. Open short when the price is below the high 20 days.
- Stop loss. 2 ATR from price entry.
- Risk management.2%.
- Trailing stop. 10 days high.
Instruments trading
The original turtles’ trading instruments are as follows:
New York coffee and cocoa sugar exchange
- Cofee.
- Cocoa.
- Sugar.
- Cotton.
Chicago Merchantile exchange
- Swiss Franch.
- Deutschmark.
- British Pound.
- French Franc.
- Japanese Yen.
- Canadian Dollar.
- S&P 500 stock index.
- Eurodollar.
- 90-Day U.S. Treasury Bill.
Comex
- Gold.
- Silver.
- Copper.
New York Merchantile exchange
- Crude oil.
- Heating oil.
- Unleaded gas.
Does the turtle strategy still work?
Maybe the polite answer to these questions is yes and no. The turtle trading strategy at the time of the experiment carried out by Richard Dennis was indeed successful at that time.
But is the market today the same as the market at that time? High price volatility and the occurrence of false breakouts cause the turtle trading strategy to not work.
But to answer those doubts, we will take the results of the backtest conducted by Rayner Teo.
In his first backtest Rayner Teo uses the standard rules of the turtle trading strategy by taking the backtest duration from 2000 – to 2019. He uses an additional parameter of $10 per trade using open market execution.
The final result is he make 4322 trade transactions, getting 36.83% winning trade, -0.38% annual return, and -95.38% drawdown.
From the backtest results, the conclusion is that the turtle trading strategy has not worked in the last 20 years using standard rules.
Next, Teo modifies the parameter entries as follows.
- Entries. open Long when the price is above 200 days high. Or open Short when the price is below the 200-day low.
- Stop loss: 2 ATR from the entry price.
- Trailing stop loss: 10-day low.
- Risk management: 1%.
- For open long use vice versa parameter above.
Trading instrument
Trading instruments traded are Feeder Cattle, Sugar, Lumber, Coffee, Soybean, Rough Rice, Soybean Meal, Soybean Oil, Wheat, and Corn.
Bonds 30-year T B, 5-year T Note, Buxl, Bund, Bobl, BTP, Canada Bond, Gilt.
Pairs:GBP/USD,EUR/USD, USD/MXN,AUD/USD, NZD/USD, USD/ZAR, USD/RUB, USD/INR, USD/CNH, USD/JPY.
Indices: S&P 500, Nasdaq,China A50, Euro Stoxx, Hang Seng, CAC 40, S&P/TSX 60, Nikkei.
Brent Crude Oil, Gasoline, Natural Gas, Heating Oil, Gold, Silver, Platinum, Palladium, Copper.
Taking the same data, and modifying the turtle rule it generates 2957 transactions with a 40.95% winning rate, an annual return of 32.12% dan Maximum drawdown of -41.51%.
Compared with the previous backtest results with the original Turtle trading rules, the results of the modification are much better. This means that the current market does have or forms a different character from the 1984 turtle trading experiment.
Is turtle trading still profitable?
Richard Dennis’s experiments on turtle trading did provide success which justifies his argument that trading is teachable and not an innate talent.
But why do some traders who are currently implementing the turtle trading strategy fail?
From the backtest experiment conducted by Rayner Teo, we can conclude that the turtle trading strategy does not work anymore, but the principles still work.
Tradingsim gives the reason why traders fail to use the turtle trading strategy is because of low volatility. This is different from the market volatility in Dennis’ experiment at that time.
Important takeaways that can inspire trading are:
- Understand the concept of our trading strategy.
- Disciplined risk management.
- Adapt to market changes.
The answer to the question of whether turtle traders are profitable now is between yes and no. The difference between market and volatility, considering this is a trend following strategy with a breakout, identifying the direction of the trend is very important.
However, the principles of risk management are still relevant to this day.
Who are the turtles traders?
Of the 1000 applications that Richard Dennis received for the turtle experiment. Some of the names that emerged to the public were a Czechoslovak-born blackjack master, Dungeons and Dragons game designer, evangelical accountant, Harvard MBA, US Air Force pilot, and former pianist.
A rigorous selection process set these turtles apart, and they were tasked with raising them to a gross of over $150 million in four years.
One of the original turtle traders is Michael Cavallo, he has a commodity trading background. Another name is a turtle trader. DiMaria with blue-collar workers as background. Michael Shannon, with an unsuccessful broker background, was taught by Dennis to be consistent, disciplined, and execute the signals that come up.
Where are the Turtle Traders now?
The original turtles are currently unknown for sure. Richard Dennis himself resigned after a client suffered heavy losses in 1988 during the Black Monday stock market crash 1987 and reported a loss of $10 million, with a total of $50 in million from 1987–to 1988.
Nevertheless, there are still many traders who learn the trading principles that Dennis taught and some are successful now.
The turtle trading strategy applies the trend following principle which is still relevant today but requires further understanding.
Turtle soup trading strategy
Taking reference from Dennis’s teachings on turtle tradition strategy, Linda Bradford-Raschke developed a short-term strategy called the turtle soup strategy. This is a trend-following strategy by utilizes a false breakout.
Pairs traded are EUR/USD, GBP/USD, and EUR/CHF in instruments Spot forex, forex CFDs, and forex futures using a 30-minute timeframe.
Turtle soup trading rules
- This strategy uses a time filter and the EMA 21 and EMA 30 indicator filters on a 30-minute timeframe.
- A buy signal is only when the EMA 21 is above the EMA 30 when the price reaches a 5 period low.
- A sell signal is only when the 21 EMA is below the 30 EMA when the market reaches a 5 period high.
- Stop-loss using 3X ATR with 20. period
- Close the buy when the market price hits a 5-period high.
- Close the sell when the market price hits a 5-period low
- All work in a 30-minute timeframe.
Turtle trading strategy crypto
The turtle trading strategy was originally applied to the commodity market where Richard Dennis was a successful commodity trader. But today many traders are trying to apply the principles of the Turtle trading strategy to the cryptocurrency market.
For example, Huobi research conducted a trial in 2018, where they concluded that the turtle trading strategy is good for traditional markets. However, when applied in the cryptocurrency market it does not provide a significant profit yield.
The reasons why the turtle trading strategy doesn’t work well in the cryptocurrency market include:
- The high correlation of prices in the cryptocurrency market affects the distribution of risk.
- The bull and bear market cycles between the cryptocurrency market and the traditional market are different. So the Donchian channel applied by turtle trading is not effectively applied to the cryptocurrency market.
- The turtle trading strategy is very popular among traders, thus reducing its effectiveness.
Reference Huobi research.
Turtle trading strategy forex
The breakout trading strategy used in the turtle trading strategy was successful during Richard Dennis’ experiments in 1984 and reports say it can increase capital from $1000 in 2007 to $25000 by the end of the year.
The popularity of turtle trading is still very well known and has become one of the strategy studies for forex traders.
However, the current forex market situation is different, traders only take the basic principles of turtle trading and optimize trades.
Just as Rainer Teo did successfully, modifying the original rules with better results.
Conclusion
The turtle trading strategy is an experiment by Richard Dennis after his trip to Singapore to see a turtle farm that can grow and develop.
The turtle trading strategy utilizes a breakout with the concept of trend following. The basic principle of this strategy is, choosing the market, position-sizing, entries, stops, and tactics.
Note: this article is for informational purposes only. Not investment advice or solicitation. Forex, CFD, and crypto trading are risky. Each trader is responsible for his investment
References
https://www.tradingwithrayner.com/turtle-trading-rules/
https://www.investopedia.com/terms/t/turtle.asp
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