Turtle Trading Strategy
The Legendary Rules-Based Trend Following System
The Turtle Trading system is a complete rules-based trend-following strategy developed by Richard Dennis and William Eckhardt in the 1980s. It proved that anyone could be taught to trade successfully using a systematic approach that removes emotional bias and focuses strictly on mathematical breakout signals and volatility-normalized position sizing. — Investopedia
Diese Strategie wird als Bildungsbeispiel bereitgestellt, das von gängigen öffentlichen technischen Analysekonzepten und Referenzmaterialien inspiriert ist. Sie dient ausschließlich Forschungs- und Produktdemonstrationszwecken und stellt keine Anlageberatung dar.
Strategy Suitability
RISK: HIGH
✅ Best For
❌ Avoid In
Requires extreme discipline and emotional control to endure long periods of small losses (drawdowns) while waiting for the rare "big winner".
Q: What is the "Filter Rule" in Turtle Trading?
The Filter Rule applies to System 1 (20-day breakouts). It states that a breakout signal should only be taken if the previous breakout signal was a losing trade, helping to avoid choppy markets.
Q: How did the Turtles calculate position size?
They used a volatility-normalized measure called "N" (based on 20-day ATR). One "Unit" was sized so that a 1-N move equaled 1% of account equity.
Q: What are the exit rules for the Turtle system?
System 1 exits on a 10-day low, while System 2 exits on a 20-day low. These wide stops are designed to allow trends to fully develop.
How This Strategy Works
5-stage decision flow from market reading to trade management
1
Volatility Scan
ATR N-Value
Calculate the 20-day ATR (N) for the target instrument
Determine current account equity and 1% risk threshold
Compute Unit Size: (Capital * 0.01) / (N * PointValue)
2
Breakout Watch
Donchian Thresholds
Identify 20-day high (Sys 1) and 55-day high (Sys 2)
Verify filter rule: only take Sys 1 if last trade was a loss
Confirm zero exposure limits haven't been exceeded
3
Entry & Pyramid
Scaling Momentum
Enter 1st unit immediately when price touches the breakout high
Add 1 unit every 0.5N move in favor, up to 4 units total
Set initial hard stop exactly 2.0N below most recent entry
4
Trend Trailing
Channel Exits
Monitor 10-day low for Sys 1 trades; exit all units on touch
Monitor 20-day low for Sys 2 trades; exit all units on touch
Maintain absolute discipline; ignore noise until channel is broken
5
Risk Braking
Equity De-leveraging
If 10% drawdown occurs, treat capital as 20% smaller for sizing
Aggressively cut all units if the 2.0N hard stop is hit
Enforce correlation caps to prevent systemic portfolio ruin
Strategy Components Reference
Related Video Resources
Learn more about the Turtle Trading Strategy strategy.
Richard Dennis Full Story | Turtle Trading Rules & System Explained
A deep dive into the history and specific rules of the Turtle Trading experiment, covering entry signals, position sizing, and exit strategies.
- Turtle Trading Strategy
- The Turtle Trading system is a complete rules-based trend-following strategy developed by Richard Dennis and William Eckhardt in the 1980s. It proved that anyone could be taught to trade successfully using a systematic approach that removes emotional bias and focuses strictly on mathematical breakout signals and volatility-normalized position sizing.
- Turtle Trading Strategy Market Suitability
- The Turtle Trading Strategy strategy works best in Sustained long-term trending markets that move for multiple months.. High volatility environments where breakouts lead to significant momentum.. Deeply liquid markets like major commodities and forex pairs.. Traders should avoid using this strategy in Choppy or range-bound markets where breakouts frequently fail and revert.. Low volatility periods that trigger "fakeout" signals repeatedly.. Short-term timeframes prone to noise and institutional stop-hunting.. The risk level is categorized as HIGH. Requires extreme discipline and emotional control to endure long periods of small losses (drawdowns) while waiting for the rare "big winner".
- What is the "Filter Rule" in Turtle Trading?
- The Filter Rule applies to System 1 (20-day breakouts). It states that a breakout signal should only be taken if the previous breakout signal was a losing trade, helping to avoid choppy markets.
- How did the Turtles calculate position size?
- They used a volatility-normalized measure called "N" (based on 20-day ATR). One "Unit" was sized so that a 1-N move equaled 1% of account equity.
- What are the exit rules for the Turtle system?
- System 1 exits on a 10-day low, while System 2 exits on a 20-day low. These wide stops are designed to allow trends to fully develop.
- System 1: 20-Day High
- System 1 uses a 20-day Donchian channel breakout for entry. A long position is entered when the price exceeds the high of the previous 20 days, provided the previous breakout signal was a loser (the "Filter Rule"). Formula: High(20)
- System 2: 55-Day High
- System 2 is a longer-term trend-following component using a 55-day breakout. Unlike System 1, it has no filter rule; every 55-day breakout is taken regardless of the success or failure of previous trades. Formula: High(55)
- Breakout Filter Rule
- To increase probability, System 1 entries are skipped if the last 20-day breakout resulted in a profitable trade. This filters out "choppy" environments where breakouts frequently fail. Formula: Previous Trade = Loss
- Volatility (N)
- The Turtles used "N" to represent the 20-day Average True Range (ATR). N is the core metric used to calculate position size, stop-loss distance, and pyramid entry increments. Formula: 20-Day ATR
- Unit Calculation
- Positions are broken into "Units" where one Unit represents 1% of total account equity for a 1-N move in price. This ensures every trade in every market has the same dollar-volatility impact. Formula: (0.01 * Capital) / (N * PointValue)
- Correlation Limits
- Strict limits prevent over-exposure to single markets or correlated groups. Max 4 units per market, 6 units per closely correlated group, and 12 units for the entire portfolio direction. Formula: Max 4-12 Units
- Initial Breakout
- The first unit is executed immediately upon a price touch of the 20-day or 55-day high. No waiting for a close; the system is reactive and captures the very start of momentum. Formula: Price > High(20/55)
- Pyramid Scaling
- Additional units are added as the trade moves in your favor. A new unit is added every 0.5N move above the previous entry, up to a maximum of 4 units per market. Formula: Entry + 0.5 * N
- Instant Execution
- Turtles never used limit orders to wait for better prices. The logic dictates that if a trend is starting, the current price is the best price you will get before it leaves without you. Formula: Market Orders
- System 1 Exit: 10-Day Low
- For System 1 (20-day entry), the exit is triggered when price touches the 10-day low. This captures the meat of a medium-term move while allowing for significant volatility. Formula: Low(10)
- System 2 Exit: 20-Day Low
- For System 2 (55-day entry), the exit is much wider: a 20-day Donchian low. This allows the system to stay in massive macro trends for months or even years. Formula: Low(20)
- The Hard Stop
- Exits must be taken immediately. There is no room for hope or "giving it one more day." The exit rules are the most critical component for preserving capital during trend reversals. Formula: Price < Low
- Maximum Stop: 2N
- Every unit has an absolute stop loss placed 2*N below the entry price. If you have pyramided, the stops for all previous units are raised as new units are added. Formula: Entry - 2 * N
- Account De-Leverage
- When account equity drops by 10%, the capital used for unit calculations is reduced by 20%. This mathematical "braking system" ensures you can never go bust during a drawdown. Formula: Equity - 10% → Risk - 20%
- Total Consistency
- The greatest risk is the trader themselves. The system only works if 100% of signals are taken with 100% of the prescribed sizing, regardless of fear or greed. Formula: 100% Rules
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