Beyond the Hype: A Important Analysis of Richard Dennis' Turtle Trading System
The Black Book of Day Trading Strategies
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The Turtle Trading System: A Recap
The Turtle Trading system, a brainchild of Richard Dennis, was a grand experiment to prove that trading could be taught. The system itself was a straightforward, trend-following strategy. It used a 20-day breakout for entries and a 10-day low for exits. The rules were simple, mechanical, and left no room for interpretation. The Turtles, a group of novices, were given these rules and a trading account. Their success became legendary.
Strengths of the Turtle System
The primary strength of the Turtle system lies in its simplicity and discipline. By removing emotion and discretion, it forces traders to follow a proven methodology. The system is designed to capture large trends, which is where significant profits in trading are often found. The risk management component, with its precise position sizing rules, is another key strength. It ensures that no single trade can wipe out an account.
Weaknesses in Modern Markets
However, the markets of the 1980s are not the markets of today. The rise of high-frequency trading and algorithmic execution has changed the landscape. The 20-day breakout, once a reliable signal, is now a crowded trade. Many algorithms are programmed to fade such obvious breakouts, leading to false signals and whipsaws. The system's performance in choppy, range-bound markets is a significant drawback. A trader using this system on SPY in a sideways market would likely suffer numerous small losses.
A Modern Adaptation
To adapt the Turtle system for modern markets, a trader might consider several modifications. Instead of a fixed 20-day breakout, one could use a volatility-adjusted breakout, such as a multiple of the Average True Range (ATR). For instance, an entry could be triggered when the price exceeds the 20-day high plus 2x the 14-day ATR. This would filter out some of the noise. Another adaptation could be to use a different exit strategy, perhaps a trailing stop based on a moving average, to let winners run further.