What is Turtle Trading

The world of trading is full of systems and strategies, but few have as intriguing a backstory as turtle trading. Developed in the 1980s as part of a famous trading experiment, this strategy challenged the belief that successful traders are born, not made. Over time, it has become a respected trend-following approach.

Turtle trading originated from a wager between traders Richard Dennis and William Eckhardt. Dennis believed anyone could be taught to trade successfully, while Eckhardt disagreed. Dennis trained novices, called "turtles," using a set system, and they achieved impressive returns, proving trading can be taught.

The turtle trading system is based on technical analysis, particularly trend-following principles. The core idea is to identify and enter trades in the direction of the long-term trend using breakouts.

It uses predefined entry, exit, and risk management rules, which makes the system objective and suitable even for beginners.

The strategy typically involves:

• Breakout Entry: Entering a trade when the price breaks out of a predefined price range (usually 20-day or 55-day high/low).
  

• Position Sizing: Adjusting the size of the trade based on volatility, known as the N value.
  

• Stop-Loss and Exits: Exiting when price hits a stop-loss or breaks a shorter trend (like a 10-day low for long trades).
  

The system's success lies in its disciplined structure. Here are some key rules that formed the foundation of the original turtle strategy:

Entry Rules

The turtles used two breakout systems:

• System 1: Enter on a 20-day breakout.
  

• System 2: Enter on a 55-day breakout if the previous 20-day breakout failed.

Only one breakout system was used at a time, based on market behaviour.

Position Sizing

The position size is calculated using the Average True Range (ATR), known as the “N” in turtle trading. This ensures that the position size is adjusted based on the market’s volatility.

Formula:
Unit size = Account risk / (N x Dollar Volatility per unit)

This maintains a consistent risk profile across all trades.

Pyramiding

The system allowed adding to winning trades (scaling in) at specific intervals, typically every 0.5N, but without exceeding a cap on total exposure.

Stop-Loss

Stop-loss levels were defined at 2N below the entry price for long trades (or above for short trades), helping to protect capital.

Exit Strategy

Turtles exited based on:

• A 10-day low for System 1 trades
  

• A 20-day low for System 2 trades
  

• Stop-loss levels triggered
  

• Rule-based exits if volatility changed dramatically

These rules ensured that traders stayed in profitable trends while cutting losses quickly.

The turtle trading method works because it:

• Removes emotion from decision-making
  

• Follows proven principles of trend trading
  

• Uses risk control to prevent big losses
  

• Offers clear entry and exit criteria

By sticking to the system strictly, the turtles capitalised on major market trends without letting fear or greed interfere.

Let’s say a stock like XYZ Ltd has been trading in the ₹450–₹490 range for a month.

• 20-day breakout: The price breaks ₹490 and touches ₹500.
  

• Entry: A long position is opened.
  

• N value: Calculated based on average range — say ₹10.
  

• Stop-loss: ₹500 – (2 x ₹10) = ₹480
  

• First pyramid level: ₹500 + (0.5 x ₹10) = ₹505

If the price continues to rise, the strategy allows scaling in and riding the trend.

The turtle trading strategy is particularly effective in strong trending environments and for traders who value structure. Here are its benefits and drawbacks:

While markets have evolved since the 1980s, the core of turtle trading remains relevant. Modern traders often adapt the original rules using:

• Different breakout lengths (e.g., 30-day or 100-day)
  

• Other instruments such as equities or ETFs
  

• Updated volatility measures like ATR(14)
  

• Charting platforms that can automate signals

Many algorithmic trading systems still use variations of turtle principles.

Turtle trading is a trend-following strategy that uses breakouts, risk control, and position sizing to generate returns. Its success lies in disciplined execution, making it a strong method for traders who prefer mechanical systems with clear risk parameters.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.