How did turtle trading turn beginners into millionaires?

23, Oct - BLOG

Turtle trading is one of those rare strategies that have been proven effective for decades. Inspired by the idea that trading can be learnt like any other craft, this system has allowed a number of ordinary people to become successful traders. What made this strategy so powerful and why does it still attract interest among modern investors? This is the question we will explore in our article.

What are the rules of turtle trading?

At the heart of its resounding success is a trading strategy based on a simple but very powerful principle: trend following. This method involves identifying moving markets - both up and down - and taking positions in the direction of those trends in hopes of capturing large segments of those movements. Unlike other strategies that attempt to predict market turning points, trend following is based on reacting to market movements as they unfold.

Entry and exit rules according to turtle trading

To enter the market, traders waited for a clear trend signal. Typically, this could be a new 20-day high or low for an initial entry or a 55-day high or low to add to an existing position. This approach allowed them to enter the market with some confirmation that a trend was indeed in place. The Turtles used Donchian channels to determine entry and exit points. A signal was given when prices exceeded the highs or lows over a 20-day period. Volatility was measured using the average true range (ATR), essentially to adjust position size; other indicators such as moving averages were used to confirm trends.

Exits were similarly systematised. Traders used stop losses to limit losses on positions that went against the expected trend. They also used ‘trend exits’ to close profitable positions based on price movement in the opposite direction of the entry. These strict rules provided not only protection but also optimised profits by capturing the essence of the trend without predicting the end of the trend.

Risk management and position size

The most important aspect of the strategy is risk management and position sizing. Turtles never risked more than 2% of their capital per trade. The 2% rule was a risk management measure designed to prevent catastrophic losses and ensure that even a series of losing trades would not end their trading career.

Position size was also adjusted according to market volatility: smaller positions were required to maintain a constant level of risk at higher volatility. This was done using the ‘N’ concept, a measure of volatility based on the standard deviation of prices over the last 20 days. By adjusting position size according to ‘N’, traders can balance risk across markets, regardless of the individual volatility of each market.

Adapting turtle trading to modern markets

The underlying trend following strategy is still applicable in today's markets. Whether it's stocks, bonds, currencies, or especially cryptocurrencies, the ability to identify and capitalise on trends can lead to significant results. For example, cryptocurrencies with their infamous volatility present both a challenge and an opportunity for trend following. By applying strict entry and exit rules, traders can navigate these turbulent waters, generating potentially large profits and effectively managing risk.

Turtle trading tools and technology

The use of modern tools and technology is essential to applying turtle trading strategies in today's environment. Algorithmic trading platforms, for example, allow traders to create trading systems that automate the entry and exit of positions based on certain rules, mimicking strict discipline without emotional interference.

These technologies also offer advanced backtesting capabilities, allowing traders to test their strategies on historical data before risking real capital. This helps to improve trading systems by determining the most effective parameters for trend following in different markets. In addition, modern risk management software can automatically calculate position size and adjust risk levels based on market volatility, making it easier to adhere to risk management principles without constant manual labour.

Relevance of turtle trading

The history and principles of turtle trading contain valuable lessons that can make trading much easier for novice traders, with an emphasis on the importance of training, discipline and emotion management.

Training and discipline

Success in trading depends less on innate intuition or luck than on diligent learning and strict adherence to a proven method. For beginners, this means that with the right education and a commitment to discipline, it is possible to successfully navigate the financial markets even without experience. Beginner Turtles, who come from all walks of life and have no significant trading experience, have transformed themselves into world-class traders through an intensive training programme and rigorous application of clear rules. This transformation says that anyone who is willing to put in the necessary time and effort can succeed.

Managing emotions

Fear of losing and greed to win can skew judgement, leading to impulsive and often damaging decisions. Turtles, however, are trained to follow systematic trading rules that minimise the emotional impact on their trading decisions. This systematic approach is particularly useful for beginners as it provides a stable framework that helps objectify trading decisions, reducing the temptation to react emotionally to market fluctuations.

For novice traders seeking to control their emotions, the lessons of the Turtles are obvious: develop and follow a well-designed trading plan. With predetermined entry, exit and risk management rules, traders can make decisions based on logic and data rather than emotion. In addition, emotions can be managed through meditation, keeping a trading diary and setting realistic goals.

Conclusion

Although turtle trading originated in the 1980s, it remains relevant to modern traders. The principles of discipline, continuous learning and methodical risk management that underpin success emphasise an enduring truth: success in trading comes not so much through luck or intuition, but through the application of a well thought out strategy. These lessons are useful not only for beginners, but also for experienced traders who want to improve their methods.