Turtle Trading System: Does it still work?

One of the most popular names in the world of trading is Richard Dennis. The two more things that are very popular are The Turtle Experiment and The Turtle Trading System, both of which were found by Richard Dennis. Richard Dennis is a famous trader and has a great following across the globe.

In 1983, he was having an ongoing dispute with his friend Bill Eckhardt about whether great traders were born or made. Richard thought that he could teach people to become great traders while Bill believed that genetics and aptitude were the determining factors. In order to settle the matter, they recruited and trained some traders, and gave them actual accounts to trade to see which one of them was correct. These traders were called the ‘Turtles’ and this whole experiment was called The Turtle Experiment and the trading system that was taught by Richard Dennis to ‘Turtles’ was called The Turtle Trading System.

Turtle Trading System

The Turtle Trading System

The Turtle Trading System was a complete mechanical trading system. It covered every aspect of trading and left virtually no decision to the subjective whims of the trader. Everything from entries, exits, and position sizing to what markets to trade and tactics for trading were specified in the turtle trading rules. In a nutshell, it is a trend following system based on the Donchian Channel Breakouts.

There were two different set of rules for the system. One was based on a time period of 20 days and other on a period of 55 days.  Entries were made whenever there is a breakout of the high or low of the preceding 20 or 55 days. The Turtles placed their stops based on position risk and market volatility. No trade could incur more than 2% risk. The stoploss was calculated by subtracting twice the Average True Range from the entry price. The exits for profitable positions were also based on breakouts. The 20-day System exit was a 10 day low for long positions and a 10 day high for short positions. Similarly, the 55-day system exit was a 20 day low for long positions and a 20 day high for short positions.

Also Read: Does Technical Analysis really Work?

Does it still work?

Yes, the turtle trading system still works. It has been verified again and again not only by manual observation but also by using backtest results. It is an evergreen trading system. Although, the profitability may not be as high as in those days and the number of false signals has increased, but still it can provide good returns. However, the statement that turtle trading rules still work does not mean that it is a sure-shot way for anyone to earn money in the markets.

Look, trading rules are only a small part of successful trading. The most important requirements of successful trading are discipline, consistency, patience, and confidence. You need these qualities so that you can stick to the rules. If you don’t follow the rules religiously, you can be sure that you will fail sooner or later. It requires a great deal of discipline and patience to face long drawdowns and to watch your profits or capital evaporate. The turtles were successful because they possessed these qualities.  A few turtles who didn’t consistently follow the rules didn’t make money and were eventually dropped from the program.

We recently tested a modified version of Turtle Trading system, and it works like a charm in most of the stocks and indices. See the link below for the complete details, AFL code and backtesting report for the system:

Donchian Channel Breakout System

Conclusion

The premise behind the turtle trading rules is nothing more than pure trend following. It is the most classic example of a complete trend following system. On the one hand, many traders are still making money by using it and on the other hand, even some of the original turtles failed to make money. Why? Because successful trading is much more than rules and systems. It is more about the ability to control your emotions and stick to the rules. Even Richard Dennis, the father of turtles said “Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.”

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