What Is Turtle Trading and How Does the System Work?

Turtle Trading represents a systematic approach to navigating financial markets, distinguished by its rule-based methodology. This strategy emerged from a unique experiment designed to determine whether trading skills could be taught and consistently applied. It has since gained recognition for its structured framework and disciplined execution. The system’s historical success has contributed to its enduring legacy in the financial world.

The Original Turtle Experiment

The Turtle Trading methodology originated from an experiment in the early 1980s by commodity traders Richard Dennis and William Eckhardt. They debated whether trading was an innate talent or a teachable skill. Dennis, believing it could be taught, proposed an experiment: he would teach his trading approach to a group of novices.

An advertisement invited applicants for a trading apprenticeship. Thousands responded, and 14 individuals were selected to become the “Turtles.” The name “Turtles” was coined by Dennis, referencing his observation that he could grow traders as systematically as turtles are raised on a farm. These participants came from diverse backgrounds, often with no prior trading experience.

The selected group underwent an intensive two-week training program in Chicago, learning a specific set of trading rules. Dennis then provided each Turtle with a trading account, funded with his own capital. The objective was to see if these inexperienced individuals could generate profits by strictly adhering to the taught system. Over the next five years, the Turtles reportedly generated over $175 million in profits, demonstrating the teachability and effectiveness of the rule-based approach.

Fundamental Trading Concepts

The foundational ideas taught to the Turtle Traders centered on core principles designed to remove subjective decision-making. A primary concept was trend following, which involves buying assets in an upward price movement and selling those in a downward trend, expecting these movements to continue. This approach aims to capitalize on sustained market direction.

Another fundamental principle was systematic trading, emphasizing a rule-based system that eliminates discretion. This meant that all trading decisions—from entry to exit and position management—were predetermined and executed without emotional interference. Adherence to this system fostered discipline and consistency. Traders were trained to control their emotions and stick to the rules, even during periods of drawdowns.

The Turtles also operated on the understanding of a statistical edge, recognizing that a trading system does not need to be correct on every trade to be profitable. Instead, the system needs to have a positive expectancy over a series of many trades, meaning that winning trades, when they occur, should be large enough to offset the inevitable smaller losses. This required accepting frequent small losses as a normal part of the trading process. Ultimately, the system provided a comprehensive framework that covered every aspect of trading, minimizing reliance on individual judgment.

Implementing the Turtle Trading System

The practical application of the Turtle Trading system involved specific, rule-based components for every aspect of a trade. The Turtles primarily traded highly liquid futures markets, including commodities, currencies, and financial futures. This allowed for efficient execution of large orders and helped to smooth returns and reduce correlation risk.

Entry into a trade was determined by specific breakout rules, signaling potential trend initiation. The system utilized two primary entry signals: a 20-day breakout and a 55-day breakout. For a long position, a trade was initiated when the price surpassed the highest point of the preceding 20 or 55 days. Conversely, a short position was taken when the price fell below the lowest point of the past 20 or 55 days. These breakout signals were identified using technical indicators such as the Donchian Channel.

Stop-loss rules were an integral part of risk management, designed to limit potential losses. The Turtles implemented volatility-based stops, placing an initial stop-loss order at a distance of two “N” (a measure of volatility) from the entry price. This ensured that if a trade moved against the position, the loss would be contained to a predefined amount. These stops were pre-determined and executed without hesitation, removing emotional bias from loss management.

Position sizing was a crucial element for ensuring consistent risk exposure across different markets and price levels. The concept of “N,” representing the Average True Range (ATR) over the past 20 days, served as a measure of market volatility. This “N” value was used to calculate the number of “units” or contracts to trade, such that a 1% change in the account equity would result from a price movement equivalent to one “N”. This meant that less volatile markets allowed for larger positions, while more volatile markets required smaller positions to maintain the same dollar risk per trade.

Finally, specific rules governed the exit of winning trades, designed to allow profits to run while protecting against significant reversals. For the shorter-term System 1, positions were exited if the price broke in the opposite direction (e.g., a long position fell below the 10-day low). For the longer-term System 2, the exit rule was a 20-day opposite direction breakout. This strategy of trailing stops allowed traders to capture substantial moves in trending markets while ensuring profits were locked in when the trend showed signs of reversing.