Deconstructing the Turtle System: Eckhardt's Blueprint for Systematic Trend Following

The Turtle Trading system, born from a debate between Richard Dennis and William Eckhardt, is more than just a set of rules; it is a complete, self-contained blueprint for systematic trend following. It addresses every decision a trader must make, from what to trade to how to execute the trades, leaving no room for subjective interpretation. This mechanical approach, heavily influenced by Eckhardt's mathematical background, is what made the system so effective and, for those who could follow it, so profitable.

The Turtle system can be deconstructed into six core components, each playing a important role in its success:

1. Markets: What to Buy and Sell

The Turtles were not specialists in any single market. Instead, they traded a diversified portfolio of the most liquid futures on the major US exchanges. This included commodities, currencies, and bonds. The principle here is that trends can occur in any market, and by diversifying, the Turtles increased their chances of catching a major move. They were not concerned with the fundamental reasons behind a trend; they were only interested in the price action itself.

2. Position Sizing: How Much to Buy and Sell

This is arguably the most important component of the Turtle system and the one that most traders neglect. The Turtles used a sophisticated volatility-based position sizing algorithm. They calculated the Average True Range (ATR) of each market, which they called "N," and then sized their positions so that a 1N move in price would equal 1% of their account equity. This meant that they took smaller positions in more volatile markets and larger positions in less volatile markets, effectively equalizing the risk across all trades.

3. Entries: When to Buy and Sell

The Turtles used a simple breakout entry system. They had two systems: System 1, which used a 20-day breakout, and System 2, which used a 55-day breakout. A breakout is simply the price exceeding the high or low of the specified period. The Turtles would enter a trade as soon as the breakout occurred, without waiting for confirmation. This proactive approach ensured that they never missed the start of a major trend.

4. Stops: When to Get Out of a Losing Position

Every trade had a predefined stop-loss. The Turtles placed their stops at 2N below their entry for a long position and 2N above their entry for a short position. This meant that the maximum they could lose on any single trade was 2% of their account equity. This rigid adherence to a stop-loss is a hallmark of all successful traders and was a non-negotiable rule for the Turtles.

5. Exits: When to Get Out of a Winning Position

This is where the Turtles made their money. They used a breakout-based exit strategy, but in the opposite direction of the trade. For System 1, they would exit a long position if the price made a new 10-day low. For System 2, they would exit a long position if the price made a new 20-day low. This allowed them to ride a trend for as long as it lasted, often giving back a significant portion of their profits before exiting. This is psychologically very difficult to do, but it is essential for capturing the massive trends that generate the majority of the profits in a trend-following system.

6. Tactics: How to Buy and Sell

The Turtles were also taught the nuances of order execution. They were encouraged to use limit orders to reduce slippage and to be patient in fast markets, waiting for the market to stabilize before entering an order. They were also taught to buy the strongest markets in a correlated group and sell the weakest, a tactic that further increased their edge.

In conclusion, the Turtle system is a masterclass in systematic trading. Each of its six components is designed to work in synergy with the others, creating a robust and profitable trading methodology. It is a evidence to William Eckhardt's belief that trading can be approached as a science, and that with a complete set of rules and the discipline to follow them, anyone can become a successful trader.