While it isn’t the granddaddy of all mechanized trading systems, it certainly is the father of many current trading systems. It is a proven, highly profitable, and completely mechanical approach to commodity futures trading, and its detailed rules are publicly available. Huh?

This is the third post in the series on trading systems. Previous posts were:
Defining a Trading System
The Magic Formula Investing Trading System

If you want to know why the original Turtle rules are available, and if you want to see exactly what they are, you should go to Original Turtles. They ask a very small donation to support the website in exchange, as opposed to some sites that sell the purported Turtle rules for hundreds of dollars. I’ll not disclose any exactitudes of the system in this post, but I will show how it answers the five important questions of system definition.

What does Turtle Trading trade?

The Turtles traded up to 21 different commodities futures markets, and were allowed discretion only in the initial choice of market. Once chosen, they were to consistently trade (or not trade) particular markets according to their initial choice.

What is the Turtle Trading set up?

There was no set up. Once the market was chosen or not chosen, it was traded based on entry, exit, and position sizing rules.

This is totally different from a stock-trader’s perspective. Some of us are used to having a potential universe of thousands of issues to choose from, with selection of market being a major issue. The Turtles, once having picked a market to trade, were always watching it, and their direction was determined by the entry and exit rules.

How much do I buy or sell?

The Turtle Trading system sized positions according to the dollar volatility of the markets traded and the correlation of the markets, and measured risk in terms of percent of equity. A more volatile contract demanded a smaller position, and vice versa. Highly correlated markets had a limit on total risk allowed, less correlated markets were allowed to carry more risk. By measuring total risk in terms of equity, the system was anti-Martingale by placing larger bets when the trader was ahead, and smaller bets when the trader was behind.

When do I enter a position?

This system enters a position based on breakouts. A breakout is defined as a contract price exceeding the high or low of a particular number of days. There were two time lengths, A days and B days, and the particular Turtle could choose to allocate their capital in any mix of those two systems, for example, 100% based on A-day breakouts, 50/50 A versus B, 100% based on B-day breakouts, or any combination. I’m unsure whether the capital allocation was “made for life” in the same way the market choice was.

Additionally, they used a “ghost trader” methodology, a filter based on whether a previous breakout would have been profitable if taken, and they had a strategy for pyramiding the positions once open. The direction of the breakout determined the direction of the trade.

When do I exit a position?

The Turtle Traders had a choice of two methods for setting initial stops, one of which was more profitable but psychologically harder to do because it led to a larger number of losses – they recognized that a low winning percentage with a large win/loss ratio can be profitable, but difficult to execute. Both of these initial stops were based on dollar volatility of the contracts traded. I’m unsure whether the choice of initial stop was “made for life” in the same way that the market choice was.

Their profit-taking exits were breakouts in the opposite direction from the trade direction, based on the time length used for entry. For example, a trade entered long on an A-day breakout (see Entry, above) would have a profit-taking exit on a C-day low, with C being fewer days than A. Substitute B and D for A and C, and you get the picture.

The philosophy of the loose exit is that, to let winners run, you have got to give them a lot of leash. By allowing some paper profits to evaporate, they opened the door to potentially much larger gains.

Summary

In terms of system design, this is about as airtight as you can get. Capital requirements and psychology are the only thing that could SNAFU a trader using this. It is possible, however, to develop systems even better than the one the Turtles used, on the same markets that the Turtles traded. It is likewise possible to develop similar systems for other markets. I like to think of the Turtle Trading system as a blueprint, an archetype to be emulated, in terms of its attention to detail and research, and its substitution of science for discretion.

I am in no way associated with the Trading Blox website or company, except as a registered participant in their forum, which I consider to be excellent and which I’ve included in my blogroll. I haven’t personally bought anything from them, and I may or may not buy their software in the future. However, for further research, you can …

Get the original Turtle Rules from one of the original Turtles.

Investigate some software designed to backtest mechanical trading systems.

Participate in their discussion forum.