What turtle trading is
Turtle trading is a rule-based trend-following method. It buys when price breaks above its recent high and sells short when price breaks below its recent low. Every decision is fixed in advance: entry, position size, adding to a winner, stop and exit. The trader does not use judgement or forecasts.
It is a classic example of trend following and breakout trading. It is worth studying for its structure, even if you never trade it.
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The turtle traders experiment
The name comes from a well-known experiment in the US futures markets several decades ago. Richard Dennis, a commodity trader in Chicago, argued with his partner William Eckhardt about whether trading could be taught or was an inborn talent.
To test this, they recruited a small group of people, many with no trading background. They taught them a written set of rules and gave them money to trade. Dennis called the students "turtles," after turtle farms he had seen abroad. The rules later became public through former participants.
Turtle trading rules: the mechanics
Markets
The turtles traded liquid futures: currencies, interest rates, metals, energy, grains and stock indices. Trading many unrelated markets was central to the method. A trend-follower depends on catching the few large trends that appear somewhere, at some time.
Entry: Donchian channel breakouts
A Donchian channel is drawn from the highest high and the lowest low over a chosen number of past bars. The turtle rules used two versions:
- Short-term system: enter when price breaks the channel of roughly the past month of trading days.
- Long-term system: enter when price breaks a much longer channel of several months.
The short-term system had a filter. If the previous breakout signal in that market would have been a winning trade, the next signal was skipped. To make sure a big trend was not missed entirely, the long-term breakout was taken anyway.
Volatility unit: N
N is the turtles' term for the average true range (ATR). ATR is a moving average of the daily range that includes overnight gaps. It measures how much a market typically moves in a day, in price terms.
Position sizing
Position size was set so that a move of one N would change account equity by a small, fixed fraction. Volatile markets therefore got smaller positions and quiet markets got larger ones. The aim was for each position to carry a similar risk. To work out sizes for your own account, use the tools on our calculators page rather than copying any fixed figure.
Adding units (pyramiding)
Once a trade moved in its favour by a set fraction of N, the trader added another unit. This repeated up to a cap. Caps also applied per market and per group of closely related markets. Adding only to winning positions is the idea behind anti-martingale pyramiding.
Stops and exits
- Stop-loss: placed a fixed multiple of N away from entry. When units were added, the stop for all units moved up (for a long) or down (for a short).
- Exit: close the trade when price breaks a shorter channel in the opposite direction. This happens well before the trend fully reverses, so part of the open profit is always given back.
A hypothetical example
This is an illustration only. It is not a real trade and makes no claim about results.
Suppose a currency pair has moved sideways for weeks and then closes above its longest recent high. A turtle-style trader:
- Buys one unit, sized from the current N.
- Adds units as price rises in steps of N, up to the cap.
- Moves the stop up behind each addition.
- Exits all units when price falls below the shorter opposite channel.
Now take another case. Price breaks out, the trader enters, and price falls straight back into the range and hits the stop. In trend-following, this second outcome is the common case.
How the system loses money
- Whipsaws in ranges. Most breakouts fail. In sideways markets the system enters, gets stopped out and repeats. Losses pile up, which is why range trading logic works against it.
- Long losing streaks. It is normal to go through long stretches of small losses while waiting for a trend. Many traders abandon the rules during these streaks. See trading psychology.
- Deep drawdowns. A drawdown is the fall from an account's peak equity to its lowest point. Exits lag behind price, so large open profits are given back. Correlated positions can also fall together.
- Gaps and slippage. Stops are not guaranteed. Prices can gap past them, especially around news or at the weekend open.
- Costs. Spreads, commissions and overnight swap fees are charged on positions held for weeks. These costs matter for a long-hold method.
- Leverage. Applied through leveraged CFDs, the rules can lose money fast. A small fixed risk per N still adds up across several units and markets.
- Crowding and change. These rules are now widely known. Markets do not have to behave the way they did when the rules were written.
What the experiment does and does not prove
It suggests that a written, consistent rule set can be taught to people without trading experience. It also shows that sizing and exits matter as much as entries.
It does not prove that the rules work today, in your markets, with your costs. The group was small and the story is partly anecdotal. It also describes a specific market period. Survivorship bias is a real concern: we hear most about participants who did well.
Any version you build should be backtested on historical data, then forward-tested on a demo account. It should also be written into a trading plan with clear risk management.
The legal position in Pakistan
The original turtles traded regulated exchange futures. In Pakistan, the regulator is the Securities and Exchange Commission of Pakistan (SECP), with trading in listed securities and commodities only via SECP-licensed securities and futures brokers. Also, per the SBP, remitting foreign exchange to overseas forex/margin/CFD platforms is not allowed through any payment channel (FERA s.5(1)), and on offshore platforms, per the SECP, offshore platforms have no Pakistani licence or oversight and offer no legal protection or recourse. Read Law and regulators before opening any account.
Frequent questions
Is turtle trading still used?
The ideas are still part of many trend-following methods. Whether the original settings suit current markets is something only your own testing can show.
What indicator do turtle trading rules need?
A Donchian channel for entries and exits, and ATR (called N) for sizing and stops. Both are standard in MetaTrader and most charting software.
Can beginners use the turtle trading system?
The rules are simple to read but hard to follow through losing streaks. Practise on a demo account first, and accept that leveraged trading can lose money quickly.
Does the turtle traders experiment prove trading can be learned?
It shows that rules can be taught. It does not show that following them will produce profits for you.
Why are exits so far from the high?
The shorter opposite channel is designed to stay in a trend until it clearly weakens. The cost is giving back part of the open profit on every trade.