Turtle trading is the name given to a family of trend-following strategies.

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The goal is to ride long-term trends from the beginning. Turtle trading was born from an experiment in the s by two pioneering futures traders who were debating whether good traders were born with innate talent, or whether anyone could be trained to trade successfully. The turtles developed a simple, winning mechanical trading system that could be used by any disciplined trader, regardless of previous experience.

In contrast to complex black box systems, turtle trading rules are simple and easy enough for you to build your own system — I highly recommend it. The earliest forms of turtle trading were manual. And, they required laborious calculations of moving averages and risk limits. As always, the key to trading success lies in consistent discipline. Your first decision is which markets to trade. Turtle trading is based on spotting and jumping aboard at the start of long-term trends in highly-liquid markets, usually futures.

My favorites are on the CME: For Agriculturals, I like Corn, Soybeans, and Soft Red Winter Wheat. In the Energy group, I like E-mini Crude CL , E-mini natgas and Heating Oil. From the Interest Rate group of derivatives, I like Eurodollar, T-Bonds, and the 5-Year Treasury Note. Finally, in Metals the best candidates are always Gold, Silver and Copper.

Since turtle trading is a long-term undertaking with a limited number of successful entry signals, you should pick a fairly broad group of futures.

I always watch and trade the same futures. So, for risk management your survival depends on choosing the right position size. The key in turtle trading is to use a volatility-based risk position which remains constant.

Program your position-size algorithm so that it will smooth out the dollar volatility by adjusting the size of your position according to the dollar value of each respective type of contract. This works very well. The turtle trader enters positions which consist of either fewer, more-costly contracts, or else more, less-costly contracts, regardless of the underlying volatility in a particular market.

This method ensures that trades in different markets have similar chances for a particular dollar loss or gain.

N is calculated as the exponential moving day True Range TR. Described simply, N is the average single-day price movement in a particular market, including opening gaps. N is stated in the same units as the futures contract. Daily N is calculated as: To determine the size of the position, program your turtle trading system to calculate the dollar volatility of the underlying market in terms of its N value. And, during times when I feel more risk-averse than normal, or when my account is more drawn-down than normal, I set 1 N as equal to 0.

You can program your algorithms to perform N-size and unit calculations weekly or even daily. Position sizing helps you build positions with constant volatility risk across all the markets you trade. You must ensure that the fractions of position size will allow you to trade at least one contract in each market. Small accounts will fall prey to granularity. The beauty of turtle trading is that N serves to manage your position size as well as position risk and total portfolio risk.

The N calculations above give you the appropriate position size. And, a mechanical turtle trading system will generate clear signals, so automated entries are easy. Breakouts are signaled when the price moves beyond the high or low of the previous day period.

In spite of the round-the-clock availability of e-mini trading, I only enter during the daytime trading session. If the last breakout, whether long or short, would have resulted in a winning trade, I do not enter the current trade. And, if traded, I consider a breakout a loser if the price after the breakout subsequently moves 2N against me before a profitable exit at a minimum 10 days, as described below.

I only enter trades after a previous losing breakout. By adhering to this caveat, you will greatly increase your chance of being in the market at the beginning of a long-term move. Some turtle traders use an alternative method which involves taking all breakout trades even if the previous breakout trade lost or would have lost.

But, for turtle trading personal accounts I have found that my drawdowns are less when adhering to the rule of only trading if the previous breakout trade was or would have been a loser. When I receive an entry signal from a breakout, my mechanical trading system automatically enters with an order size of 1 unit.

The mechanical trading system keeps adding to my holding until the position limit is reached, say at 4N as discussed earlier. I prefer limit orders, although you can also program the system to favor market orders if you wish. I buy the first unit at Then, if the price move continues, I buy the third unit at [ Finally, if gold keeps advancing I buy the fourth, last unit at [ Turtle trading involves taking numerous small losses while waiting to catch the occasional long-term changes in trend which are big winners.

Preserving equity is critically important. So, for long positions I set the stop-loss at 2N below my actual entry point order fill price , and for short positions the stop is at 2N above my entry point. This usually means that I will place all my stops for the total position at 2 N from the unit which I added most recently. Yet, in case of gaps-on-open, or fast-moving markets, the stops will be different.

The advantages of using N-based stops are obvious — The stops are based on market volatility, which balances the risk across all my entry points.

Comprehensive Guide to the Turtle Trading Strategy - System Trader Success

My mechanical trading system is programmed to exit at a day low on my long entries, and at a day high for short positions. If the day threshold is breached, my system exits from the entire position. The mechanical trading system helps overcome my greed and emotional tendency to close out a profitable trade too early.

I let my mechanical trading system make those decisions for me. Still, my pet mechanical trading system works very well. Turtle trading algorithms offer a quick way to build your own do-it-yourself mechanical trading system which is simple, easy-to-understand and effective. If you have the discipline to keep your hands off and let your mechanical trading system do its job, turtle trading may be your best choice. The Comprehensive Guide to the Turtle Trading Strategy was originally published at OneStepRemoved.

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Which markets are best for turtle trading? Constant-percentage risk based on volatility The key in turtle trading is to use a volatility-based risk position which remains constant.

You should program your turtle trading system to calculate true range like this: Limiting risk by adjusting for volatility To determine the size of the position, program your turtle trading system to calculate the dollar volatility of the underlying market in terms of its N value. The units for position size in a given market are calculated as follows: Day High Low Close TR N 1 3.

Entry timing when turtle trading The N calculations above give you the appropriate position size. I enter the trade when the price moves one tick past the high or low of the previous 20 days.

Order size When I receive an entry signal from a breakout, my mechanical trading system automatically enters with an order size of 1 unit. Turtle trading stops Turtle trading involves taking numerous small losses while waiting to catch the occasional long-term changes in trend which are big winners. After all, turtles are slow, but they usually win the race… — By Eddie Flower The Comprehensive Guide to the Turtle Trading Strategy was originally published at OneStepRemoved. About the Author System Trader Success Contributor Contributing authors are active participants in the financial markets and fully engrossed in technical or quantitative analysis.

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