Wednesday, August 29, 2012

Turtle Trading

Much has been written over the years about the Turtle Trading rules formulated by the commodities speculator Richard Dennis. One of my favorite free explainers of his system is here.

I also recommend these fine books on the subject:

Long-time readers of Private Trader will recall that I used Turtle Trading for a while last year, and then abandoned it, discussing my reasons in two essays, "The Trouble with Turtles" and "Smackdown: Joe Ross vs. the Turtles".

I've recently resumed using Turtle Trading as an element in my strategic mix. After spending nearly a year thinking about it, I've concluded that my earlier problems with the system had much to do with trading psychology.

Let's face it, the wide stop/losses and exit levels required for Turtle Trading can be fear-making.

But in the past year, I've worked with time-based trading vehicles, such as diagonal option spreads, and have grown more comfortable with giving positions room to fluctuate. So, the Turtles are back.

I've written up my own version of the Turtle Trading rules, in the schematic style that I favor. Here the write-up:

  • N: The 20-day Average True Range, a measure of average daily price change.
  • DV: Dollar volatility = N x dollars per point ($1 per point for stocks and options)
  • Unit: 1% of account / DV
  • Breakout: A move beyond a breakout level, either below the lower price channel or above the upper price channel.
  • Breakout level: The 20-day price channel boundary in either direction.
  • Exit level: The 10-day price channel boundary opposite the breakout direction (e.g., lower channel line in the case of an upside breakout).
  • Stop/loss: 2N below the entry price in the case of long position or above the entry point in the case of a short position. If no position was taken, then the stop/loss is calculated using the daily closing price.
  • Successful trade: A position closed by the price hitting the exit level.
  • Failed trade: A position closed by the price hitting the stop/loss.
Unit holding limits:
  • Market (stock and its options): 4 units
  • Closely correlated markets (industry): 6 units
  • Loosely correlated markets (sector): 10 units
  • Direction (long or short): 12 units
Exit rule:

Close a position entirely when either the exit level or the stop loss is touched. If the trade was opened on a move beyond a 55-day price-channel boundary, then set the exit level at the 20-day price channel boundary opposite the breakout direction.

Entry rule:

If the price breaks out, and if the prior breakout resulted in a failed trade, then open a position, otherwise skip the trade. If the price moves beyond a 55-day price-channel boundary, then take the trade whether it was skipped or not.

Adding units:

Add an additional unit to the position at 1/2N intervals (from the fill price) until three additional units have been added (six additions).


Three pools are available for trading: The Index Pool consisting of a 17 exchange-trade funds and indexes, the Equity Pool consisting of 345 high-volume equities trading for $15 and higher, and the Forex Pool, consisting of 16 major forex pairs.

A note on technology:

It is important to remember that Dennis formulated his method in the 1980s, before the explosion of desktop technology that has greatly changed traders lives.

He didn't even have a good spreadsheet. His trading conditions in that archaic age were really quite primitive.

As a result of the technology limits Dennis faced, he had to limit the number of trading vehicles to a few commodities and maybe some currencies.

He certainly couldn't contemplate keeping tabs on more than 300 stocks, plus exchange-traded funds and a number of currency pairs.

Contrast that with today, where I can call up stock charts easily, complete with the various price-channel levels used in turtle trading, and then use a spreadsheet to instantly calculate my stop/loss and exit points, as well as the prices that trigger additions to the position.

I can easily set alerts on the charts to tell me when a Turtle Trading breakout has occured.

I will admit, even with modern tools, keeping track of 345 stocks is a bit much. So I've used my usual strategy when overwhelmed by he sheer number of vehicles I want to track. I randomly sliced  the pool into manageable chunks of 16 stocks each, and each day or so I set alerts on those 16 stocks.

When I get an alert, I check to chart to see whether it is valid -- whether the alert level still signals a Turtle breakout -- and then take the trade or pass it, as appropriate.

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