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Turtle Trading Strategy: Turtle Trading Rules
Intro
The crypto trading markets can be a tough environment where volatility can lead to emotional decision-making processes. Now, do you imagine developing a system that can help you overcome irrational behaviors and also provide specific rules for entry and exit points when trading?
That's the excellence behind the Turtle Trading Strategy. Two rules serve as the basis for a complete trading system based on the trend-following strategy, integrating the Donchian indicator alongside capital management policies.
In this article, we will unveil those 2 rules for the understanding and application of Turtle Trading.
Overviewing of The Turtle Trading Strategy
The Turtle Trading Strategy is a trading system based on a trend-following strategy that emerged from an experiment in the 1980s conducted by famous traders Richard Dennis and William Eckhardt.
The experiment was based on training 13 participants aspiring to successful trading. They were given a trading account with the goal of growing it consistently by applying the turtle system.
The basic idea behind the turtle strategy developed by these two traders is that the trend is the most problematic part of the market movement, so the trader must focus on identifying and following it.
The strategy suggests using various tools and rules to determine the trend and the entry and the exit points of the market.
Key Aspects of the Turtle Trading Strategy:
- It is a trend-following approach.
- Aims to overcome emotional trading.
- Consists of two methods: one for the long-term and the other for the short-term.
The System: Turtle Trading Rules
The Turtle Strategy can seem complex, but in summary, employing the Donchian channel the system is divided into two rules:
- Rule 1: Short-term system based on a 20-day advance. The entry condition is a breakout of the 20-day high or low. The operation was skipped if the previous signal was successful.
- Rule 2: Long-term system based on the 55-day breakout. The principle is the same, but data from 55 days is taken into account. This method was used in case the 20-day progress was not achieved due to the reasons stated above.
Let's explore these rules more deeply with a table.
Short-term Rule
The first short-term turtle strategy system uses the 20-period Donchian channel to establish the price breakout.
It consists of buying on the breakout of the upper part of the channel if the last signal was a loss and selling on the breakout of the 20-day lower part if the last signal was a loss.
The strategy determined that the channel breakout signal should be ignored if the last signal had been profitable.
If the turtles ignored the signal from this short-term system and the market continued its trend, they would have to use another system to return to the market.
Here is when the long-term system takes action.
Long-term Rule
The second system of the turtle strategy uses a 55 period Donchian for a long-term approach, is simpler and consists of:
- Buy order when the upper line of the 55-day channel is broken if you are not in the market.
- Sell order when the lower line of the 55-day channel is broken if you are not in the market.
Stop Loss Calculation
To calculate the Stop Loss, the turtles used the 30-day Average True Range (ATR) indicator, the value N, (maximum 2 ATR).
The turtles also managed to turn their profits into winning trades with reinvestments to further maximize their profits, which was typically known as pyramiding.
They could only 'pyramid' a maximum of four operations, each separated by a volatility of ½.
Buying the upper breakout of Donchian Channel
Exit System
To exit their positions, turtles generally use breakout signals in the opposite direction, allowing them to make very long trends.
- For the short-term system: Exit long positions if price hits a 10-day low. Close short positions if the price hits a 10-day high.
- For the long-term system: Exit long positions if price hits a 20-day low. Exit short positions if the price reaches the 20-day high.
Capital Management
The turtles could initially only risk 2% of all operations. As we mentioned previously, the pyramid model also required establishing precautionary rules that involved reducing volumes: for every 10% drop in an account, the risk was proportionally cut by 20% and so on.
Remarking Important Concepts of the Turtle Trading System
One of the key aspects of the strategy is the use of an automated system to determine market entry and exit points.
Taking this as a base concept we can state the following:
- A trader must determine what market conditions are considered "trends" and use those conditions to decide whether to enter the market. This may include the use of various indicators, such as moving averages or trend strength indicators.
- When a trader identifies a trend, he must set entry and exit points according to the rules of the turtle strategy. For example, a trader may use dashed trend lines or other confirmation signals to determine market entry and exit points.
- One of the main advantages of Richard Denis's turtle strategy is its simplicity and logic. This makes it accessible to traders of all experience levels and can help improve trading results.
- There is no place for emotions in the market. Coherence and balance are needed.
- Traders have to stick to the plan day after day. It is important to start from the size of the deposit.
- The strategy is to know exactly when you will buy or sell.
Conclusion and Call to Action
Turtle Trading is a robust system that outlines clear rules and steps for entering and exiting from positions, applying a trend-follow strategy. One of the key ideas is that developing and sticking to a trading system is fundamental. If there is a strategy and traders follow it strictly, then traders will make profits. Otherwise, instinct and emotions will prevail.
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