Turtle Strategy

The Turtle strategy is a trend following and volatility adjusted strategy. Originally applied to trading futures contracts, it's also applicable to investment in ETFs which use futures contract as underlying instruments.

The Turtle Trading strategy is one of the well-known trading systems in commodities trading. It was created by the famous commodities speculator Richard Dennis and his partner Bill Eckhardt in 1980’s. It was originated from the Turtle Experiment which Richard Dennis proposed and gradually gained its worldwide fame for earning an average annual compound rate of return of 80% for several years. It’s also applicable to investing in ETFs which use futures contract as underlying instrument.

The system of Turtle trading
The Turtle strategy is a trend-following and volatility adjusted strategy which covers the following aspects of trading.

• Diversification: Turtles try to trade in diverse, uncorrelated and liquid futures markets.
• Risk control: Turtles uses volatility of a market to decide the position size.
• Trend following: Turtles employs a momentum driven strategy and has a well defined stop loss rules.

The following is the detailed description of Turtle trading rules.

1. Markets-What to trade

Under this strategy, people trade in futures, or popularly called commodities which are traded on US exchanges in Chicago and New York. And only the most liquid markets are chosen because of the large trading volume.

2. Position Sizing-How much to buy or sell

It uses a position sizing algorithm which normalizes the dollar volatility of a position by adjusting the position size based on the dollar volatility of the market. This means that a given position would tend to move up or down in a given day about the same amount in dollar terms (when compared to positions in other markets), irrespective of the underlying volatility of the particular market.

• N- The underlying volatility of a particular market

N is simply the 20-day exponential moving average of the True Range, which is now more commonly known as the ATR. N represents the average range in price movement that a particular market makes in a single day. 
                                         Daily True Range=Maximum (H-L, H-PDC, PDC-L)
Where:
                              H- Current high        L- Current low      PDC- Previous day’s close

        And N is calculated as:                     

                                                          N= (19*PDN+TR)/20
 
        Where:
                 PDN- Previous Day’s N            TR-Current day’s True Range

• Dollar volatility adjustment
  

The first step in determining the position size is to determine the dollar volatility represented by the underlying market’s price volatility (defined by its N).
                                          Dollar Volatility= N*Dollar per Point

• Volatility Adjusted Position Units

The Turtles built positions in pieces which we call Units. Units are sized so that 1N represented 1% of the account equity. Thus, a unit for a given market or commodity can be calculated as:

Unit=1% of Account/Market Dollar Volatility=1% of Account/ (N*Dollar per Point)

• Units as a measure of Risk

Since the Turtles use the Unit as the base measure for position size, and since those units were volatility risk adjusted, the Unit was a measure of both the risk of a position, and of the entire portfolio of positions.

3. Entries- When to buy or sell
The Turtle system is a trend following strategy. They buy as the market moves from trending sideways to trending up and also sell short just as a trend down would begin, exiting each trend after it ends.

• Breakouts

The Turtle rules use two related system entries-system1 and system 2, each based on Donchian’s channel breakout system. A breakout is defined as the price exceeding the high or low of a particular number of days.

1. System 1- A short-term system based on a 20-day breakout
   If the price exceeds the 20-day high, then the Turtles will buy 1 Unit to initiate a long position. System 1 breakout entry signals would be ignored if the last breakout would have resulted in a winning trade. This breakout would be considered a losing breakout if the price subsequent to the date of the breakout moved 2N against the position before a profitable 10-day exit occurred.
2. System 2- A simple long-term system based on a 55-day breakout
   All breakouts for System 2 would be taken whether the previous breakout had been a winner or not.

• Adding Units
  

Traders enter single Unit long positions at the breakouts and add to those positions at 1/2 N intervals following their initial entry. This 1/2 N interval is based on the actual fill price of the previous order. So if an initial breakout order slipped by 1/2 N, then the new order would be 1 full N past the breakout to account for the 1/2 N slipped, plus the normal 1/2 N unit add interval.

4. Stops- When to get out of a losing position
The most important thing about cutting your losses is to have predefined the point where you will get out, before you enter a position. If the market moves to your price, you must get out, no exceptions, every single time.

• Turtle Stops
  

Placing stop orders are not preferred because it may reveal traders’ positions or trading strategy. Instead, this strategy encourages traders to have a particular price, which when hit, would cause them to exit our positions using either limit orders, or market orders.

• Stop Placement
  

Traders place their stops based on position risk. No trade could incur more than 2% risk. Since 1% of price movement represented 1% of Account Equity, the maximum stop that would allow 2% risk would be 2 N of price movement. Turtle stops are set at 2N below the entry for long positions, and 2 N above the entry for short positions.
In order to keep total position risk at a minimum, if additional units are added, the stops for earlier units are raised by 1/2 N.

5. Exits-When to get out of a winning position

• The System 1 exit is a 10 day low for long positions and a 10 day high for short positions. All the Units in the position will be exited if the price goes against the position for a 10 day breakout. 
• The System 2 exit is a 20 day low for long positions and a 20 day high for short positions. All the Units in the position will be exited if the price goes against the position for a 20 day breakout.

6. Tactics- How to buy or sell

• Entering orders- It’s better to place limit orders instead of market orders because limit orders offer a chance for better fills and less slippage than do market orders.
• Fast markets- Do not panic and wait for the market to trade and stabilize before placing orders. Wait until some indications of at least temporary price reversal before placing orders.
• Buy strength, sell weakness- Always buy the strongest markets and sell short the weakest markets in a group when signals come all at once.

The Turtle way of thinking

• Trading rules are only a small part of successful trading. The most important aspects of successful trading are confidence, consistency, and discipline.
• Always trade with confidence and the discipline to consistently apply the rules we are given. This is the secret of success as traders.
• Think like a turtle:

1.  Trade in the present. Do not dwell on the past or try to predict the future. The former is counterproductive, and the latter is impossible.

2.  Think in terms of probabilities, not prediction. Instead of trying to be right by predicting the market, focus on methods in which the probabilities are in your favor for a successful outcome over the long run.Take responsibility for your own trades.

3.  Don't blame your mistakes and failures on others, the markets, our broker, and so forth. Take responsibility for your mistakes and learn from them.

 Performance and Risk

S&P Commodity Trend Indicators strategy resembles in investing in similar ETFs.

• It allocates fund assets in 2 equal parts-Commodities and Financial.
• It involves in Commodities by investing in ETFs, such as DBB, DBA, DBP and DBE, which Turtle strategy also invests in.
  
• In determining positions, it gives greatest weight to the most recent return and least return to the one 7 months prior.

See Also

• Curtis M. Faith. Way of the Turtle: The secret methods that turned ordinary people into legendary traders. McGraw-Hill eBooks,2007.
• Curtis M. Faith. The original Turtle trading rules.2003
• Michael Covel. Review of "The Complete Turtle Trader" and Background. Turtletraders.com, 2005.
• The Turtle Story. Originalturtles.tradingblox.com