The Turtle Trading Strategy is a powerful momentum breakout strategy that has proven to work in all market conditions. It's all about staying patient and.
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At the same time, a wider take profit would be used on the right than on the left to capture larger price moves. Adjusting the stop and the target simultaneously will also make sure that the reward: Although the stop loss size in point distance changed for every trade, the percentage risked always stayed the same. The table below shows two examples of how the turtle traders would adjust their stop and position size based on volatility. Always determine the stop loss distance first. Most amateur traders start by evaluating how many contracts they want to buy and then set their stop loss order so they can achieve a random risk goal.
If the turtle traders want to enter two trades in different instruments, they had to look at the correlation between the two markets first. A positive correlation means that the two markets move in the same direction and a negative correlation means that they move in opposite directions. How to use correlations in your trading. Two markets move in opposite directions click to enlarge. The two charts above show two completely different scenarios: On the left, you see two price charts with a very high positive correlation the two graphs almost move identical.
On the right, you see two charts with a negative correlation they move in opposite directions. A trader who enters two trades in the same direction two buy or two sell trades on positively correlated markets increases his risk because it is more likely that the two trades end up the same. A trader who enters two trades in different directions one buy and one sell trade in positively correlated instruments will probably not guaranteed not have the same result.
When trading positively correlated markets in the same direction, your risk increases. When trading negatively correlated markets in the same direction, you can lower your risk. The turtle traders did not come up with this strategy, but it has been used by professionals as long as trading exists. It is the irrefutable law of how financial markets work and understanding correlations is of great importance.
The turtle traders usually did not enter the full position size on the first entry. Their first position would be 0. At the same time, they moved their stop loss behind price to protect their position. 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: 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.
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We are dedicated to helping you build profitable trading systems with free tools, And, in Forex, it’s AUD/USD, CAD/USD, EUR/USD, GPB/USD, and JPY/USD. The Comprehensive Guide to the Turtle Trading Strategy was originally published at zooguillem.ga Turtle trading is the name given to a family of trend-following strategies. It’s based on simple mechanical rules to enter trades when prices break out of short-term channels. The goal is to ride long-term trends from the beginning. A Turtles-Style Breakout Strategy. Share 0 Tweet 0 Pin it 0 +1. By: zooguillem.ga The Turtle Trading System. The heart of the system governing trade entries was to trade a range of instruments, entering long when a price made a 55 day high or short at a 55 day low: Donchian channel breakouts. Free Forex Trading Courses.