Private Trader Trading Rules

Regular readers will know that I've been working on modifications to the Turtle Trading rules in order to reduce head fakes and other loss-inducing signals that hurt my trading results.

Here is my current set of rules for directional trades, on Google Docs:

Private Trader: Rules for Directional Trades

My write-up of the original Turtle Trading rules is here.

I've often said in my analyses that the Turtle Trading rules, while useful, aren't as good as they could be.

William Denis' trend-following system dates from 1983, two years after the IBM PC hit the market. It was a world of command-line interfaces, manual trading and very limited tools for private traders (people who trade on their own account without the fancy stuff brokers can command).

I first began trading in the year before, in 1982, and in those days, getting a daily stock chart could be a challenge, much less something that tracked intra-day movements.

It was a different world from today's, with our high-velocity trading and hundreds of analytical tools at a private trader's fingertips.

Some people treat the original Turtle Trading system as gospel that must never be modified. I say, if we can't do better after three decades, we need to throw in the towel and put our money in a nice money-market fund paying half a percent annual interest.

My modifications of the Turtle rules come in three crucial areas.

I want to select the things I trade so that they are biased toward success. The original Turtle system was used mainly for futures, which limited choices of vehicles for trading. They picked a few things to trade, those archaic Turtles did, and left it at that.

I'm using the system for stocks and foreign exchange, which gives me a huge and changing universe to select from. In my trading rules write-up, I describe the methods I use for constructing pools of stocks and currency pairs.

For entering positions, I want a confirming signal. I've chosen the RSI (the most popular analytical signal in the world) because it works with both stocks and forex.

But the MACD, or something that uses volume, such as the Force Index, would do just as well. (Volume-based indicators won't work with currencies.)

I also want to guard against false breakouts, or head fakes, where the price breaks out but then retraces. The original Turtle rules required that any breakout be taken immediately. I impose a 30-minute waiting period, and won't take the trade if the price has retraced past the breakout point in the opposite direction.

I think of it as a sort of time diversification. There's nothing sacred about half an hour. It can be 15 minutes, or even five, at the trader's discretion. Alternatively, a trader could decide to wait until the next day before trading any breakout.

For exiting positions, I'm trying to address two problems with the original Turtle rules.

One is the stop/loss upon entry, which is based on the price at which the trader opened the position. It never changes. So if the price rises sharply after breakout, the trader is left with a stop/loss that is still loss-making despite the gain in paper profits.

I address this by making the stop/loss upon entry a trailing stop. This will increase the number of trades that are stopped out, but also protect profits.

The second is the Turtle exit point that marks a successful trade: A cross beyond the boundary of the 10-day moving average that is opposite the direction of the trade. This exit method comes into play once the 10-day boundary moves closer to the current price than the initial stop/loss.

My problem is that the 10-day boundaries move independently of each other. Depending upon the price history, the boundary could be far removed from the current price, especially if the breakout happened on sharp rise from a lower level. I found that this method often guarantees larger losses than I like.

If the 10-day boundary is closer to the price than my trailing stop, I'll use it for the exit, but that rarely happens.

I've also added an additional method using the RSI. If the price breaks into the overbought or oversold territory on the indicator, and then returns to the middle zone, I close the position immediately.

In closing, I'll note that I specify directional trading for these rules because I use another strategy for part of my funds: A known-risk strategy involving option spreads, concentrating on diagonal spreads on the indexes and a few very liquid stocks.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.