Turtle Trading the Forex: Will This Legendary System Hold Up?
If you have been a trader for any length of time, chances are good you’ve at least heard of the “turtle experiment” and “Turtle Trading”, but here’s the story just in case…
Two famous commodities traders, Richard Dennis and William Eckhardt, were in a dispute over whether great traders were born or made. (The old nurture versus nature debate.) Richard believed that you could teach people to become great traders, while Bill thought traders were born.
To settle the disagreement, Richard and Bill decided to run a little experiment. So, they place an ad in the Wall Street Journal and the New York Times recruiting inexperienced traders into the business of professional trading.
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Out of the thousands who applied, only 13 people were selected. In December of 1983, the group was invited to Chicago for two weeks of training. The trainees went live with real money in their accounts starting in the New Year. They were given a smaller account for the first month, and if they did well they were given a $1 million dollar account to trade.
In the end, Richard Dennis turned out to be right. The group earned an average annual compound rate of return of 80% over the next four years, proving once and for all that great traders could be MADE.
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SIDE NOTE: The group got the name “turtles” after a statement made by Richard Dennis. Following a trip to Asia where he visited a turtle farm (of all things), Richard made the comment: “I want to grow traders just like they grow turtles in Singapore.” And that’s just what he did!
Now that you know the story behind the legendary “Turtle Traders”, I’ll explain what spurred this report…
I learned of the Turtles years ago and was always fascinated by the story. In fact, it is one of the reasons that you are reading this report right now!
Recently I read a book by Curtis M. Faith, one of the original “Turtle Traders”, called Way of the Turtle. At just 19 years of age, Curtis was by far the youngest trader in the group, but interestingly enough he was also one of the most successful. Reading his story re-ignited my interest in the “Turtles”, so I felt compelled to test their original system in the Forex market.
The remainder of this report will cover what I found…
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SIDE NOTE: The original “Turtle Trading Method” was a commodity system, and to my knowledge no one has published a report on how well it works in the Forex market.
Rules for Turtle Trading
Entries
The Turtle system used two different but related entries. The Entries where based on a channel breakout system taught by Richard Donchian. The first entry was shorter term and had more rules. The second entry was longer term and far simpler:
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Entry #1: Buy long one pip above the breakout of the 20 day high. Sell short one pip below the breakout of the 20 day low.
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Entry #2: Buy long one pip above the breakout of the 55 day high. Sell short one pip below the breakout of the 55 day low.
The entries occur one pip above or below the breakout price, not at the end of the day.
The additional rules for the first entry are as follows: 1) The breakout entry signals would be ignored if the last breakout would have resulted in a winning trade. 2) If the 20 day breakout was skipped due to this rule, then the 55 day breakout would be taken if hit. 3) The 55 day breakout would be taken so that large trends would not be missed. All 55 day breakouts were to be taken.
The Turtles added to their initial position at 1/2N intervals. The 1/2N interval was based on the entry price of the previous order. The N that the Turtles used was the 20 day exponential moving average of the True Range or ATR and it was multiplied by the dollars per point (or pip in our case) to arrive at the dollar adjusted volatility.
Dollar Volatility = N * Dollar per Point(Pip)
The dollar adjusted volatility was then used to determine the size of each unit. Units were sized so that 1 N represented 1% of the account equity.
Unit = 1% of Account/Market Dollar Volatility
If the price continued to move in the direction of the breakout, then additional Units would be added every 1/2N up to four units.
Stops
The Turtles used a 2N stop loss and since 1 N was equal to 1% of the account, the maximum stop that was allowed was risking 2% of the account per trade. If a unit was added the stop loss was raised 1/2N so that the 2% risk remained unchanged.
Exits
The turtle exit was a breakout system just like the entry. The only difference between the entry and the exit was the time frame of the breakout.
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Exit for Entry #1: Sell one pip below the breakout of the 10 day low. Buy to cover one pip above the breakout of the 10 day high.
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Exit for Entry #2: Sell one pip below the breakout of the 20 day high. Buy to cover one pip above the breakout of the 20 day low.
All units were to be closed out if a breakout occurred.
Example of Long Turtle Trade
The following is an example of a profitable turtle trade in the EUR/USD pair. As you can see, when the price broke the 20 day high (indicated by the blue line on the top) the first unit was bought. As the price continued to rise additional units were bought every 1/2N unit a total of 4 units were held. All four units were exited when the price broke one pip below the 10 day low.
EUR/USD
Example of Short Turtle Trade
The following example shows a profitable sell short in the EUR/USD pair using the turtle system. The trade was entered at the 20 day low breakout, indicated by the red line. One additional unit was sold every 1/2N unit, until the trade contained four units total. This trade was exited when the price broke the 10 day high breakout. This is indicated by the blue line above the candlesticks.
EUR/USD
Tactics
The Turtle’s were encouraged to enter their orders using limit orders. The reason for this is two-fold. First, limit orders offer a chance for better fills. When you use a limit order you will be filled at the limit price or better. So, there shouldn’t be any slippage.
The second reason that limit orders were to be used is that large orders would not move the market. If it does move the market it will move it less if a limit order is used. This should not be an issue in the Forex market. However, it is possible if you are trading a pair when both the currency markets that make the pair up are closed and your trading large amounts.
The Turtles were taught to hold off on placing orders in fast moving markets. Most new traders will see a fast moving market and feel like they have to jump in using a market order or they will miss the move. During a fast moving market, most of the market order will get filled at the worse possible price. When the fast market is over the price normally retraces 50% or more.
It is always better to wait until the market has stabilized before placing your orders. Use a limit order that will be filled as the price retraces.
Results
The following tests were conducted over the past four years and four months. I chose this time frame because it mirrors the length of the original “Turtle Experiment”.
The tests were conducted on several pairs but I limited the results to just the four major pairs. The reason for this is simple: these were the best results out of the 9 pairs tested.
The first set of tests were conducted using the 20 day breakout entry, 1/2N to add to the position, a 2N stop loss, and a 10 day breakout exit. If the pervious trade would have been a winning trade, then the most current breakout was ignored.
So, if you had traded the Turtle System in the Forex the past four years, here’s how you would have done trading the first set of entry rules…
GBP/USD
EUR/USD
USD/CHF
USD/JPY
The following results were obtained after testing the second set of entry rules. We only entered a trade at the 55 day breakout and every entry was taken. Units were added every 1/2N up to four units. The stop loss was placed at 2N below the entry for long trades and 2N above the entry for short trades. The trade was exited at the 20 day breakout.
All the tests were conducted using an account size of one million dollars.
The spreads were taken into consideration as the following: GBP/USD = 4 pips, EUR/USD = 3 pips, USD/CHF = 4 pips, and USD/JPY = 3 pips.
GBP/USD
EUR/USD
USD/CHF
USD/JPY
Note to System Developers
Here is a note for those of you that are aspiring system developers and I hope that is everyone reading this report. Did you notice that the turtle system is a complete trading system?
What I mean by this is that the Turtle System tells the trader:
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Markets - What buy and sell
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Entries – When to buy and sell
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Position Size – How much to buy or sell
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Stops – Where to place your stop loss
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Exits – When to get out of a wining trade
The most profitable way to trade is to use a complete trading system. The turtle system was a complete trading system and that is why the original Turtles where able to make money after just two weeks of training.
Summary
The turtle system did not perform as well as I had anticipated. The first set of rules made an annual rate of return of 7.39% across the four major pairs. The second set of rules made 10.25% annual rate of return across the four majors. Due to the trending nature of the Forex market, I was looking for large profits but there were none to be found.
After the first few tests I reviewed the code to make sure that it was correct, and it was. Then, I pushed back the dates so that I could test over ten years thinking I was not testing enough data. Finally, I tested as many pairs as I could.
I believe that the turtle system did not work as well in the Forex because this system was designed that be traded in a basket of commodities. Ideally, the commodities would not be correlative at all so that moves of one commodity would not effect the others. This independent movement would allow for profits from one trending commodity to off set losses in another commodity.
If you want to trade the turtle system in the Forex, you will need to find the pairs that are not correlative to each other. Then, you will need to trade the 55 day breakout as it seemed to be the most profitable from our tests.
I do believe that more research is needed on breakout systems in the Forex. There is definitely a trader’s edge that can be gained using this type of system.
For those of you that are interested in learning more about the Turtles and the turtle trading system, I highly recommend reading Way of the Turtle, by Curtis M. Faith. This is a great book for traders and system developers alike.
With that said, I do encourage you to read more about the Turtles and their system. And if nothing else, this experiment should give you confidence that you too can learn to trade. After all, traders truly are MADE…not born.
Until next time…
Good trading,
Jason Fielder
Developer, Forex Impact™
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