A Look At The Turtle Trading System Cho Sing Kum 12 th Mar This article was initially written for the March issue of Chartpoint magazine which unfortunately wound down operation recently and this article was not published.
It is now re-edited and produced here. Check out our Turtle Trading Software, TurtleFarm, that is programmed to the Turtle Rules.
It All Began In The year was I had just decided that I wanted to go full-time into technical analysis. I took a sabbatical from work in October to learn on my own, not having gone any where with technical analysis with early The Singapore representative for Compu-Trac happened to be back in Indonesia so I was helping him out here. They were a bunch of very nice guys and the office was having problem setting up the computer to download data from Commodity Systems, Inc.
They were asking me why I did not go to Chicago. They were telling me I should go and handed me a newspaper cutting. You see, about that time, Richard Dennis and Bill Eckhardt had put out advertisement for trainee traders for the Turtles program. I gave it some thought but because I was not in a position to relocate to Chicago, it never crossed my mind to apply. Six months into my sabbatical I was offered a job at Drexel which I took up.
Since then I was always curious about the Turtle trading method. Not A Well Kept Secret The Turtles were sworn to secrecy.
While the Turtle method appeared to be a well kept secret, it was actually not. Channel breakout was growing in popularity in the s. So was volatility adjusted risks. All these were well known market knowledge.
But while I was hearing about the successes of the Turtles, I never knew that their method was already out in the market. I was still looking out for it. The Book I finally went to Chicago in I went not for any Turtle system but for company orientation that took me to New York, Chicago and Tokyo a year after I joined Merrill Lynch Capital Markets. It was something I did during with trip that had a big impact on my learning. I went to the bookshops around the Chicago Board of Trade and bought all the trading books I could carry.
Once back home, I ordered more books from Traders Press Inc. Good and often lesser known trading books were hard to come by in Singapore bookshops in the s. I could not remember whether I bought this book in Chicago or from Traders Press. Wherever it was, I was very fortunate to have bought the book, Reminiscences Of A Stock Operator, first published in It was actually a biography of Jesse Livermore, one of the most respected stock and commodity market speculators of all time.
I was so fascinated by this book that I included many quotes of wisdom from it in the daily market closing commentaries I was writing. I wrote the Nikkei, Hang Seng, Chicago Treasury Bonds and Eurodollar futures closing commentaries. Now you may wonder turtle has this book to do with the Turtle method. In my opinion it has a lot to do although I did not know initially. Fast forward your clock seventeen years to April The Turtles Revealed Their Secrets That month I was pointed to the website www.
It was a new website wherein the claimed Original Turtles Trading Rules were revealed by Curtis Faith, one of the Turtles in the first class in Dec I also knew about True Range and Average Can Range from J. What I did not know was how these were put together to form the Turtle Trading Rules. My Most Important Discovery And now the most important of my discovery - the combination of these parts resulted in what I would call the actualization of all that Jesse Livermore wrote in his book into a complete trading system!
This was what the Turtle method was to me - a actualization of a book. I mean I could relate them. So it was that twenty years later, I finally got to learn the Turtle method after all. Naturally, I gave the Turtle Trading Rules a thorough check out. Its rules covered every aspect of trading, and left no decisions to the subjective whims of the system. It had every component of a Complete Trading System.
I agree with this. It is further stated that it covers each of the following decisions required for successful trading: I will cover the other four. Tactics, well you will learn this through experience.
I will also not explain the details of the rules and the mathematics behind the calculation. You can find these in the published rules and are strongly encouraged to download the rules turtle the website mentioned above.
The rules in pdf format used to be available for free download but not anymore. The website is also no longer hosted on its own and is now part of a commercial website. A compulsory donation is now required to support that commercial website infrastructure. I feel this goes against the intended trading of the Free Rules Project which has the support of Richard Dennis. Here is quoted from an earlier download of the rules: The Original of the Free Rules Project.
This project had its seed in various discussions among a few of the original Turtles, Richard Dennis, and others regarding the sale of the Turtle Trading System rules by a former turtle, and subsequently, on a website by a non-trader. It trading in this document, which discloses the Original Turtle Trading Rules in their entirety, free of charge.
In the examples that follow I will be using these for illustration. There are two features that I have not programmed. It only allow for the first entry price of any pyramid entry strategy using the EntryPrice command and the average entry price of the pyramid entries using the AvgEntryPrice command. As such, I have to do backward calculation to derive the subsequent pyramid entry prices. There are certain entry situations where it is not possible to calculate the entry price of the 3 rd unit, for example, when the 2 nd and 3 rd units were entered on the same day when using daily historical data for testing.
Without any reliable method of calculating the entry price of the 3 rd unit it is not possible to enter the 4 th unit. So I only program the codes to pyramid up to a maximum of the units only. These aside, the other challenging part is coding the Last Losing Trade Filter. So in the process I programmed four indicators to show the properties of all theoretical trades to guide me.
The can indicators are: The 2N-stop and day channel exit are red dots. These dots are superimposed on the price chart to give visual representation of all theoretical trades no pyramid. N is the price distance of one Average True Range of the last 20 days. Now remember inpersonal computers were not common yet. A market with higher volatility will have a bigger N and dollar value hence smaller position size while low volatility produce a smaller N and dollar value hence a bigger position size.
Both are channel breakout systems. System 1 is shorter-term based on a day breakout while System 2 is longer-term based on a day breakout.
Very briefly, System 1 would go long on a break above the day high or go short on a break below the day low. System 2 would go long or short on a break of the day high or day low respectively.
In System 1, there the a filter rule which is not applicable in System 2. System 1 will only initiate a position provided the last theoretical trade is a loss. If the last theoretical trade is a winner, then System 1 will only enter when price breaks out of the FailSafe breakout point of day high for long or day low for short to avoid missing major moves. FailSafe Breakout At point A, System 1 went short on a breakout of the day low. This turtle was liquated at point B when price breaks above the day high.
A few days later at point C, price breaks above the day high. This would have been a long entry but because the last trade was profitable, this trade was therefore not taken. About trading month later at point D, price has traded higher to break above the day high. System 1 then went long so as not to miss the bigger move that followed. Fig 3 shows the system without pyramid so as not to clutter the chart for clarity.
Now because of a limitation of TradeStation EasyLanguage where I work reliably get the 3 rd unit entry price to allow a 4 th unit to be added so I programmed the trading system to pyramid to a maximum of 3 units. It lowers overall position risks and yet enjoys maximum benefits when it catches good trend moves. However there will be times when this may pose a problem. This was followed by a long re-entry in early Dec.
The money management stops are placed at 2N away from the entry price of the last unit entered. The position risk for a 1 unit position is 2N. Basically the stops for earlier positions are tightened up on pyramiding.
Now some will have problem with these risk numbers. So bear in mind that 5 percent is a very high number. But this is the way the Turtles trade and their high risk appetite may be the reason behind their tremendous record in such short period of time in the s. Trade exits are days against for System 1 and days against for System 2. This means that for System 1 when price violates the day low, longs are exited, vice versa for shorts.
For System 2, use the day against. Therefore in short, System 1 is 20 in, 10 out while System 2 is 55 in, 20 out. The system are can in Fig 5. Tightening of stops when work units can result in whipsaw.
In the first situation shown on the top chart in Fig 5, the system was run without pyramiding, meaning only 1 unit was entered long forex the Friday before 17 Nov. Immediately, the money stop was placed 2N below the entry price. This stop, represented by the red dots, was never hit and was eventually replaced by the day low exit. This day low exit condition was met on 22 Dec and the position exited as shown.
In the second situation shown on the lower chart in Fig 5, the system was run with pyramiding work to 3 units. The first unit was entered as above on Friday 14 Nov. The money stop was tightened raised so that it is 2N below the with price of the 3 forex unit.
Unfortunately, the market retraced enough to trigger this 2N stop from the 3 rd unit entry price. The entire position of 3 units was stopped out as a result.
The long position was re-entered when price broke out of the day high again in Dec and exited as in the first example on 22 Dec.
This is one situation you have to live with when pyramiding. Notice that in the example, the market did not retrace to the original 2N-stop calculated from the 1 st unit entry price. How Do You Add Units Or New Positions? Although the rules did stipulate a maximum of 12 units long and 12 units short for a total of 24 units obviously this has to be a portfoliothis could translate into a total portfolio risk of 30 percent, assuming 3 long positions of 4 units each and 3 short positions of 4 units each.
Earlier, you have seen how a 4-unit position represents 5 percent risk. In the event that all this positions turned out wrong, the portfolio will be down by 30 percent! What if this is a new portfolio without any profit cushion? Indeed A Complete Trading System, And A Very Good One Forex Turtle trading system is indeed a very good complete trading system. But if you want to get some testing done with the presently available technical analysis software, you will be disappointed.
Nevertheless, the logic is very sound, risk is systematically managed, and the result can be proven. The Japanese Yen was one of my anchor trading instruments for many years so naturally I was interested in what type of result the Turtle System 1 would produce.
These are hypothetical runs on historical data for the purpose of system testing and evaluation. These are purely computer runs where no actual trades were done. Both hypothetical accounts started with USDconverted to Yen on the first bar of data. All figures are in Yen.
I am very impressed. Turtle System 1 without pyramiding. Turtle System 1 with pyramiding. Currencies, Stocks, Futures and Options trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the currencies, stocks, futures and options markets.
Don't trade with money you can't afford to lose. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT.
These charts and commentaries are provided as an education on how technical analysis can be used. These charts and commentaries are not to be construed as investment advice or any other investment service other than the originally intended purpose as stated here.