Turtle trading system is considered as a complete trading system. It covers every aspect of trading. It clearly defines when to enter and exit, how much to bet and how to be disciplined. This system was invented by Richard Dennis,he borrowed $1,600 and reportedly made $200 million in about ten years. Here is his very simple turtle trading system.
What to trade?
This is a trend following system. Gives good results only in the trending market. Only those things should be traded which has high volume. Richard Deniss Turtle traders applied this system on commodities, currencies and selective indices and stocks but mostly they have traded in commodity futures. Avoid trading with this system where the volume is less and that don’t trend well.
When to make entry?
A very simple breakout based system is used to entry. Two systems were used known as system 1 and system 2. Traders with short-term time horizon can use system 1 while traders who have more patience were advised to use system 2.
This system uses a four-week or 20 days price breakout for entry and a two-week price breakout in the opposite direction for an exit. If the market makes a new four-week high its a buy. If the market makes a new four-week low its a sell. Two weeks low/high is used as stop loss that is when the stock price goes below the two-weeks low one should exit the long position and when the stock goes above the two-week high one should exit the short position.
System two is a longer term trading system. It uses eleven week that is 55 days breakout for an entry single and a four week that is 20 days breakout in the opposite direction as stop loss. The motto of both the system is to buy the strength and sell the weakness.
Apart from the 2 weeks and 4 weeks stop loss for the system 1 and system 2. Richard Dennis also used the volatility based stop loss. Turtles used a 2N stop which is two times of daily N and N is usually a 15 days average true range(ATR). If you are trading ICICI bank and its ATR is 8 then 2N will be 16, therefore stop loss of 16 points will be used.
There is no predefined target in this system you have to just ride the trend until the stop loss is not hit.
Managing the risk
Profitable trades take care of themselves you have to manage the risk in the losing trades. Make sure your losses are small and profits are large. How much quantity to buy and sell is a very important aspect of Turtle trading system. Trading with too much quantity increases the chances of losing entire capital quickly while trading with too less quantity minimized the profit potential. For risk management Dennis suggest not to risk more than 2% of trading capital. What does it mean? Let’s assume you have trading capital of 1,00,000. The 2% of this 1 lakh will be 2000 Rs. You should not loose more than Rs 2000 in any of your trade. If the price of any stock is 100 Rs and your stop loss comes out to be 90 then you should not buy more than 200 shares of that stock. This 2% risk will give you 50 chances on your trading capital. You will get out of the market only when you are wrong 50 times.
How accurate is this system?
If you are thinking that this system has a very great strike rate then you will be disappointed. The accuracy of this system is 30-35%. Low accuracy doesn’t matter when the rewards are very big. This is a trend following system and sometimes trend continues for weeks and months and you make great profits which are enough to compensate the loss of losing trades.
Is this system easy to follow?
It’s not an easy to follow the system as the accuracy of this system is low. You will have more losing trades than winning trades. You have to face lots of losing trades continuously which can make you depressed and you may get out of the game. That’s why Richard Dennis says
I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.
That’s why this trading system can make money for you only when you have confidence, consistency, and discipline. Dennis advised to be very consistent in taking the entry because most of the profits in a year usually come from only two or three large winning trades. If some trades are skipped those big winners could be missed. Getting out of a losing position is equally important. Traders who do not cut their losses can’t be a successful trader.
Abhishek is an Engineer MBA in Finance and Certified Research Analyst. He is an active trader and investor in the stock market since 20010. Follower of the philosophies of Warren Buffet and Peter Lynch in investing and trend following in trading.