The turtle trading system is an interesting idea to explore both for the trend follower and for the breakout trader. The importance of early entry is that the first stages of a trend are often where momentum is strongest and where the most money is made. They were people with little or no trading experience who were given a precise turtle strategy in forex of rules to try to beat the markets.
In this post we’ll look at a simplified example of how the turtles timed their entry into a trend and then would track that trend as it advanced. Trend Follower The turtle trading strategy uses a dual breakout system to enter the market. The idea behind this is to identify and profit from newly developing trends. The two systems work together and complement one another. New trends often get underway after a breakout of some kind. A breakout is simply where the price starts to move strongly in a new direction, moving outside of an established range, and breaking new highs or new lows. That’s the time a breakout trader wants to enter into the market.
However the fact is that most breakouts don’t grow into trends that are big enough for profits to be made. The turtle’s fast breakout is designed to enter trends early on. It aims to build the position at the earliest stages, as a new trend is just forming. On the other hand the turtle’s slow breakout system works on a longer time frame and requires a stronger indication of a trend’s existence. The purpose of this is to enter trends that are more established than would be indicated by those on a shorter time frame. The slow breakout signal also allows for greater retracements of the trend than the fast breakout system does.
This allows it to stay in strong trends, for longer. The 20-day system An example of a 20-day breakout is shown in Figure 1. The turtle system triggers a buy entry which is marked on the chart with a blue rectangle. The trigger happens because the price breaks out of a 20-day range and makes a new high. This happens at the candle marked with the blue arrow. Following on the trend rises further and at the green arrow the first accumulate signal is triggered. Another accumulate signal is triggered at 1xN because the price continues to rise in the direction of profit.
At this point the total size of the position is 3 units and the average entry price is 1. After the third unit is added, the trend starts to pull down again. Notice that no further units are added so the position size doesn’t change. The average price paid for the 3 units is 1. On the candle marked with the red close arrow the price descends to 1. Using trailing stops: The turtles used trailing stops whenever adding units to a position.
The first was to lock in profits on earlier trades and the second was to limit downside risks on later ones. The stops for all units would typically be placed at 2xN from the last entry price where the order was filled. So for example if the last position was filled at price 1. 65 pips, this means the stops for the units added earlier would all be raised to 1. According to the turtle rules, a 20-day breakout is only traded on when the previous breakout failed. Therefore, since this one ended with a stop loss, this next breakout would be traded rather than skipped.
55-day system The slow breakouts are similar to the fast breakouts but are triggered when longer and more substantial trends might be starting. The price must breakout of its 55-day’s range and that triggers a buy order or a sell order depending on whether a high or a low is reached respectively. Unlike the fast breakouts, the 55-day breakouts are traded on every signal. The 20-day breakout on the other hand will only trigger if the previous one failed as was the case above.