One of the oldest most reliable method of trading is trading Break-outs. Trading break-outs means executing trades after price breaks out from resistance and support levels. long trades are taken after a confirmed break upwards from a resistance level, and short trades are taken after a confirmed break downwards from support levels. There is a popular group of traders who have successfully made millions trading this system, they are called the Turtles.
The Turtle Experiment
In the early 1980s, a famous commodity trader called Richard Dennis had a bet with his friend William Eckhardt. Richard Dennis bet that anyone could be taught to trade profitably, provided the person being taught adhered strictly to the system. William Eckhardt believed that trading required some natural skill, some kind of sixth sense, that instinct more than skill was what separated the legendary traders from the rest of the pack. he argued that it was this gift or instinct that made Richard Dennis such a successful commodity trader.
Richard Dennis immediately set out to get a team of novice traders, he placed an ad in the papers requesting for applications from anyone interested in joining his trading firm.
Considering how popular Richard Dennis was, there were a lot of applications. He finally selected a group of candidates for his project, and taught them his trading rules. The training lasted for two weeks, after which he gave them real money to trade. This group of traders went on to turn tens of thousands into hundreds, simply by following the rules they were taught. Richard Dennis called them "turtles" because he believed traders can be grown, almost the same way turtles were grown in Asia, from his visit to a turtle farm in Singapore.
The turtle system is a trend-following system that uses break-outs for its entries. The general concept behind this strategy was to trade with the trend, basically one buy highs and sell lows. This is because at those highs and lows, there's usually a lot of volume and price usually has momentum to continue its move. The system rules covered four main categories:
- Volume to be traded
- Stop loss placement
- Exit strategy
The volume traded refers to the position size of the trade to be executed. The turtles used volatility as a measure for determining the position size of any trade. They used the market volatility to measure risk. Markets with high volatility were considered more risky, so the positions traded would be less compared to markets with low volatility.
The turtles were encouraged to trade several markets, this diversification ensured that all their entries were not tied to one market. So the positions were spread across several markets depending on the volatility of each market. Each time a loss was encountered on the account, the starting position size was decreased, the position size was also increased with account gain.
The turtles traded break-outs. They had two entry methods; a short-term break-out of the 20-day Exponential Moving Average and a long-term break-out of the 55-day Exponential Moving Average. So anytime price exceeded the high or low of the preceding 20-days or 55-days, they would take their entries.
The AUD/USD chart illustrates the entries. The chart contain two 20-day EMAs, one has price calculated at the high and the low at the low.
The chart with both 20-day EMAs.
Applying the 55-day EMAs
It is obvious that the 55-day EMAs have a better performance in the long-term.
it should be noted that the turtles used the daily charts and traded commodities. The turtles also added more positions at specific intervals, as the trend went in their favor.
They added more units until their maximum allocation for that market was reached. They had to be consistent with this trading system, because in some occasions the bulk of their profit for a year could come from two or three trades.
Stop Loss Placement
The maximum stop loss allowed in the turtle system was 2.0%. So the losses in any market was tightly controlled.
The turtles took their entries based on price break-outs, and a lot of break-outs do not result in a new trend. So they had a high amount of losses, but their profits more than made up for all the losses incurred. The principle was to stay with the trend for as long as possible. For their exits, using the 20-day EMA method, they used the 10-day EMA low for their exit. While using the 55-day EMA method, they used the 20-day EMA low for exits.
The turtles did not take every trade signal, there were some filters added to sharpen the system's edge.
A 20-day EMA break-out was ignored, if the previous 20-day EMA break-out would have yielded a profitable trade.
For such a successful system to have been around, in public view for so long, one tends to wonder why everyone isn't making millions from the markets. Well, like my grandma use to say, "the chef may know how to make the soup, but knowing isn't the same thing as doing"
The moral of this article is that anyone can be taught to trade, and every trader can be profitable provided you are consistently applying a right trading system.