The Turtle Trading System is one of the most famous trend following strategies in trading history. Developed by legendary commodity traders Richard Dennis and William Eckhardt in the 1980s, the system earned its name from the group of students selected to be trained in the strategy – known as the “Turtles”.
The experiment was intended to prove that anyone could be taught to trade successfully if they followed a set of rules. The original Turtle Trading System rules and techniques revealed remarkable profits for Dennis and his students, demonstrating the power of trend following.
Even today, the core principles of the Turtle System continue to influence many top trading strategies. This comprehensive guide will reveal the original Turtle Trading rules, looking at:
What Was the Turtle Trading Experiment?
- Background on how the Turtles were recruited and trained
- Performance results from the Turtle portfolios
- Their trend following approach to the markets
Turtle Trading System Rules and Formula
- Entry techniques and signals
- Exiting trades and position sizing
- How the Turtles traded multiple markets
Is the Turtle Trading Strategy Still Viable Today?
- Examining system adaptability and profitability now
- Key lessons modern traders can learn from the Turtles
Let’s examine this iconic trading system and the powerful concepts behind its success.
What Was the Turtle Trading Experiment?
The Turtle Trading experiment was the brainchild of two leading Chicago commodities traders, Richard Dennis and William Eckhardt. The two disagreed on whether great traders were born or could be trained.
To settle the debate, Dennis recruited and trained a group of students in his own trading approach. They were nicknamed the “Turtles” after the turtles he kept on his turtle farm.
Recruiting Complete Novices as Trading Students
In 1983, Dennis placed an ad in the Wall Street Journal seeking trading apprentices with “no knowledge of markets. Thousands applied, but only 13 were chosen, with no trading experience required.
The group included a professional gambler, an actor, a security guard and a farming reporter. Dennis deliberately selected people from diverse backgrounds to prove anyone could learn to trade well.
Intensive Two Week Training in the Turtle System
Over a two week training period, Dennis taught the Turtles his specific trend following trading system. Key components included:
- Trading philosophy – the wisdom of riding long term trends using breakout techniques
- Entry rules – precise formulas for entering new positions in futures markets
- Exit rules – when to take profits and cut losses on their trades
- Position sizing – optimal leverage and risk management for their accounts
The Turtles had to follow the trading system exactly as taught, without deviation. After the training period, Dennis gave them trading accounts to manage ranging from $250,000-$2 million.
Turtle Portfolios Earned Impressive 80-100% Annual Returns
The trading results from the Turtles were remarkable:
- In 1984 the portfolio returns ranged from 55% to 251%
- In 1985 the returns were between 20% and 80%
- Overall the Turtles achieved an average annual return of over 80% during the experiment
This performance demonstrated clearly that with the right training, beginners could become very profitable traders, just as Dennis had argued.
The Turtle experiment proved two key insights about trading success:
- Trading rules are more important than inherent skill – ordinary people can succeed by precisely following a profitable trading strategy.
- Managing risk is crucial – many Turtle traders with lower risk profiles generated superior returns.
Now let’s examine the specific Turtle System trading rules and techniques responsible for their exceptional results.
Turtle Trading System Rules and Formula
The original Turtle Trading System featured precise entry techniques, exit rules, and position sizing guidelines Dennis taught his students. The strategy focused on trading trends in commodities futures markets.
Entries: Breakout System Filters Trends
The Turtles used breakouts to enter new trades when a market began trending strongly. Their entry rules featured two breakout variants:
1. System 1: 20-day Donchian Breakout
The Turtles bought when the price exceeded the highest high of the last 20 days. They sold short when the price dropped below the lowest low of the last 20 days.
This breakout method acts as a filter, only entering a trend after it is underway and has strength. The 20-day parameter determined the “noise filter”.
2. System 2: 55-day Breakout
For less volatile markets like bonds and currencies, a longer 55-day breakout parameter was used. This captured longer term trend moves in slower markets.
The Turtles analyzed market volatility to determine whether to apply the shorter or longer breakout. They also diversified across multiple unrelated markets to smooth returns.
Exits: Protecting Capital with Stop Losses
The Turtles used two types of stops to exit losing positions quickly before major damage:
- Volatility stops – Based on the market’s 20-day volatility, exited trades after a set adverse move against the trader’s position.
- Breakout stops – If the price broke the entry day’s low (for longs) or high (for shorts), the trade was exited immediately.
These stops locked in profits on winning trades as well. The Turtles let profits run with trailing stops based on a market’s volatility characteristics.
Position Sizing: Balancing Risk Across Markets
The Turtle system position sized all trades according to the dollar volatility of a market:
- More volatile markets received smaller position sizes
- Less volatile markets received larger position sizes
The precise position size was calculated from the trader’s account equity and the market’s 20-day Average True Range (ATR). This balanced risk exposure across the portfolio.
Now that we’ve covered the original Turtle Trading rules and techniques, let’s examine if this trend following system still holds up well for today’s markets.
Is the Turtle Trading Strategy Still Viable Today?
While the Turtle Trading experiment concluded in the 1980s, the core strategy Dennis taught remains relevant even for today’s markets. However some key adaptations can optimize performance.
Core Principles Remain Effective
Modern analysis confirms the wisdom of the original Turtle approach:
- Filtering noise with breakouts – Waiting for breakout confirmation before entering trades still reduces whipsaws successfully.
- Letting profits run – Trailing stops to ride trends remain essential for profit maximization.
- Cutting losses quickly – Stop losses limit downside damage from failed trades. Volatility stops adjusting to market conditions are superior to fixed dollar or percentage stops.
These aspects of the Turtle System reflect basic trading fundamentals that are timeless.
Enhancements for Today’s Markets
While the classic Turtle approach remains robust, traders today could further optimize the strategy by:
- Adding more breakout variations – The 55-day breakout offered a useful filter on slower currency and bond markets. Identifying additional optimal breakout periods for different market types could improve entries.
- Incorporating new exits – Exit techniques based on momentum oscillators like MACD could complement the original Turtle stops for better timing.
- Using wider market sets – The Turtles traded more limited futures markets. Applying their approach across today’s greater range of liquid markets like stocks, forex, cryptocurrencies could diversify trends.
- Automating signals – Algorithmic systems can automatically scan markets for Turtle breakout signals and optimal position sizing 24/7. This enables efficiently harvesting trading opportunities at scale.
With the above enhancements, the profitable core principles of original Turtle trend following could thrive in current markets.
Key Lessons Modern Traders Can Learn from the Turtles
Beyond the specific trading rules, Dennis imparted broader wisdom to the Turtles that all traders should heed today:
- Adopt a trading mentor – Dennis’ training was invaluable to the Turtles’ success. Find an experienced mentor and precisely follow their proven strategy.
- Manage risk diligently – The Turtle’s risk management focus was essential. Prioritize risk control above all else.
- Diversify across markets – Spread positions across diverse, uncorrelated markets to smooth returns.
- Discipline over conviction – The Turtles had no discretion; they followed the rules precisely whether or not they agreed. Cultivate similar discipline in your own trading.
These timeless principles contributed greatly to the Turtles’ outstanding performance. Today’s traders should commit to upholding these lessons.
Conclusion
The fascinating Turtle Trading experiment demonstrated that ordinary people could be successfully trained to become expert traders. The trend following system Dennis taught the Turtles, built on breakouts, prudent risk management and diversification across markets, generated triple digit returns.
While markets have evolved, the core strategy principles of identifying and riding trends remain valid. Enhancements around entries, exits and market breadth can potentially optimize the approach for current trading. Above all, the broader wisdom Dennis imparted around risk management, discipline and diversification are invaluable for traders in any era to uphold.
By mastering these lessons from the original Turtles, modern traders can work to replicate their trading glory. The Turtle legend lives on not merely as historical curiosity, but for the profound universal truths it revealed about how to approach the markets with success. Their story continues to inspire new generations of traders to this day.
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