Richard Dennis Turtle Trading Strategy & Rules Explained
Richard Dennis Turtle Trading Strategy is one of the most legendary experiments in trading history time and again. During his compelling experiment, Dennis established the fact that anybody could be taught to trade effectively by just sticking to the defined rules and displaying the necessary discipline. We are going to clarify the principles behind the Turtle Trading system in this article and also tell you how the system functions and how you can use TrendSpider’s Turtle Trading indicator, scanner, and strategy tester to follow the same path as the Turtle traders.
Key Takeaways
- Richard Dennis created the Turtle Trading Strategy to prove trading success can be taught through rules, not instincts.
- Breakout trades, characteristically strict exit strategies, and thorough risk-control were the hallmarks of the system.
- TrendSpider allows the users a better way to experience the efficacy of Turtle Trading through an exclusive Turtle Trading indicator, real-time scanners, and automated backtests that can work with any asset.
The Story of Richard Dennis and the Turtle Traders
Background on Richard Dennis and William Eckhardt’s Debate
Around the early 80s, the debate between two businessmen, Richard Dennis, a successful commodities trader, and William Eckhardt was whether trading could be taught. Dennis believed that almost anyone could become a profitable trader with training while his partner thought only natural-born instincts led to success. Eventually, Richard Dennis’ Turtle Trading experiment was the answer to this argument.
The 1983 Experiment: Recruiting 14 Novices and Teaching Them One System
Dennis placed an ad in The Wall Street Journal, selected 14 novices to train after screening thousands of applicants, and gave them the Turtle Trading System crash course. The Turtles got a practical two-week training in the Turtle Trading System where they learned how to trade mechanically by following unambiguous rules.
How the “Turtles” Turned $5k into Millions by Following Mechanical Rules
Dennis demonstrated that instincts should not be depended upon, instead, a diligent systematic approach has to be put into practice. His students-the Turtles- earned $175 million over five years, which has become one of the most talked trading success stories of all time, and still garners admiration today.
Why the Experiment Matters to Traders Today
The experimental phase of the Turtle Trading system remains an unforgettable lesson in methodical trading. It was a warning that the achievement of trade was more in strict adherence to the well-defined rules rather than the reliance on one’s instinct. In today’s world, the same set of principles under modern tools like TrendSpider can be effortlessly followed to automate and enhance economic strategies.
What Is the Turtle Trading Strategy?
The Turtle Trading Strategy is one of the trend-following breakout systems and it works this way to catch the market with large trends by making market entries just after the breakout of the important price levels. Dennis came up with two systems under the strategy:
- System 1: Buy when the price hits a 20-day high and exit when the price drops to a 10-day low.
- System 2: Buy when the price hits a 55-day high and exit when the price drops to a 20-day low.
Risk Management Using ATR (2N Stop)
The risk is controlled by a volatility-based stop loss which is called 2N stop and it is determined by doubling the 20-day Average True Range (ATR). Thereby, the stop level is a very efficient way to prevent big losses.
Position Sizing and Pyramiding Entries
Position sizing is based on the risk of 2% rule, in which no more than 2% of the total trading capital is risked for a single trade. The strategy is also designed to use pyramiding, i.e. the trader can add more positions to the winning ones by opening a new one when the market trend goes in his favor.
Turtle Trading Rules: The Core Principles
Entry Rules
- System 1: Buy when the price breaks above the 20-day high for capturing short-term trends.
- System 2: Buy when the price breaks above the 55-day high for capturing longer-term trends.
Exit Rules
- System 1: Exit when the price falls below the 10-day low.
- System 2: Exit when the price falls below the 20-day low.
Stop Loss Rules
The 2N ATR stop puts the stop loss at twice the 20-day Average True Range (ATR) and adjusts the stop depending on the market volatility to keep the trade safe.
Position Sizing
Use no more than 2% of your total account balance as a risk for each trade. The position size is determined by the volatility of the asset, thus more volatile markets will have smaller positions.
Pyramiding
Start a winning trade longer position by increasing the number of shares when the price goes another half of the ATR in your favor, thereby getting the most out of the trend.
Advantages and Limitations of the Turtle Trading System
Advantages
- The Turtle Trading system is easy and rule-based, which allows traders to follow a clearly outlined plan and thereby reduce emotional decision-making, which in turn facilitates the maintaining of consistency.
- Its success has been proven live in the markets, where the original Turtle Traders managed to turn $5,000 into $175 million in profits, a clear indication of the strategy’s effectiveness.
- The approach is adaptable to different asset classes such as futures, stocks, crypto, and forex. Such a flexibility enables the traders to make profits from the trends in different markets.
- This system can be supported by software such as TrendSpider which can take care of the entries, exits and stop losses without any interruptions making the execution always consistent.
Limitations
- The Turtle Trading system is patience and discipline-based. Traders must be willing to ‘eat’ small losses until the big winnings come, which can be quite a challenge for people, who want to see their money grow quickly.
- Since it is a trend-following method, the trader has to endure a number of small losses before the large winners, that is why it may seem unattractive to a trader, who is looking for quicker profits.
- It is a perfect fit for the markets that are moving according to the trend and not so well in sideways or choppy markets because it can have frequent stop-outs in those situations.
How to Use the Turtle Trading Strategy in TrendSpider
1. Turtle Trading Indicator
The Turtle Trading Indicator makes it very easy for you to visually see on your chart where the entries, exits, and ATR stops of the strategy have been placed.
- Visual cues: The indicator communicates the key events with colors:
- Cyan/orange for System 1 entries and exits.
- Blue/purple for System 2 entries and exits.
- Magenta marks the ATR stop levels.
- White indicates pyramiding markers for scaling into positions.
The Turtle Trading Indicator is free to import from the TrendSpider Store, giving you easy access to all the key signals you need to implement the strategy.
2. Real-Time Turtle Scanners
Real-Time Turtle Scanners by TrendSpider are designed to make the traders aware of live 20-day or 55-day breakouts. Consequently, the users are able to identify points of entry immediately.
- Customizable scans: By customizing your scanner, you can decide if you want it to be focused on System 1 or System 2 breakouts only, thus, helping you trade only that part of the Turtle Trading system which you prefer.
- Intraday and daily scans: In the intraday or daily timeframes, you can run your scans to either realize breakouts as they occur or to audit daily trading opportunities.
With the help of the scanners, one can be alert to markets all the time and breakouts can be observed as they happen.
3. Alerts and Auto-Trading
If you set alerts in TrendSpider, you will not have to watch the charts all the time but you will still be updated on your trades.
- Start by setting alerts either for stop-losses or exit signals in order to control risk and, when required, get a hold of profits.
- Automate with SignalStack: Route alerts to your broker via SignalStack for automated execution of trades, minimizing manual intervention.
- Multiple notification methods: Get notified via email, SMS, mobile app, or webhooks, ensuring that you’re always informed about important market events.
These options play an important role in the facilitation of your trading and at the same time, you do not lose any crucial signals and on top of that, you can also automate your trade executions.
4. Backtesting the Turtle Trading System
The application of the Strategy Tester along with the Variance Explorer by TrendSpider enable you to conduct the backtest of the Turtle Trading method on any asset class, such as stocks, futures, forex, and crypto.
- Test across any asset: Whether you’re trading stocks, futures, forex, or crypto, TrendSpider allows you to backtest the strategy on your preferred markets.
- Analyze key metrics: Use the Strategy Tester to analyze crucial performance metrics like win rate, drawdowns, risk/reward, Sharpe ratio, and the equity curve.
- Compare with buy-and-hold: Compare the performance of the Turtle Trading strategy against a simple buy-and-hold strategy to evaluate its effectiveness over time.
Backtesting with TrendSpider helps you understand how the Turtle Trading strategy would perform in real market conditions and refine your approach before live trading. Explore the Turtle Trading tools here.
FAQs About Turtle Trading
What is the Turtle Trading Strategy?
Turtle Trading is a breakout trend-following system developed by Richard Dennis that gets involved at 20-day or 55-day highs and gets out at 10- or 20-day lows with limited risk management.Who were the Turtle Traders?
The 14 students group non-professionals trained by Richard Dennis in 1983 who made more than $175M by using his system.Do the Turtle Trading rules still work today?
Yes, the core of trend-following and proper risk management is always relevant. Nowadays, with such an instrument as TrendSpider, the strategy can be implemented and modernized markets.What is the 2N stop in Turtle Trading?
It is a volatility-based stop loss two times the 20-day Average True Range (ATR) used to limit the potential loss.How can I trade the Turtle Trading system in TrendSpider?
Load the Turtle Trading Indicator, make use of the real-time scans, prepare alerts for trade positions and backtest the strategy straight away in the TrendSpider platform.
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