Made famous by the Turtles, this system is a Price Channel breakout or also known as a Donchian Channel breakout. The Turtles had two versions they used however you can easily change the entry and exit to your timeframe. A key benefit of this system is that the price channels will catch all good trends since they will have to make a new high or low. Exits are through a trailing price channel that is less periods than the entry so the system is not in the market all the time as we know that markets don't trend all the time. The Turtles used pyramiding to add to their winners to increase gains while still maintaining the same risk.
Entry occurs when the price breaks out of a prior high or low of the price channels. The Turtle System 1 entered long when the price broke from a 20 day high and entered short when the price broke from a 20 day low. The Turtle System 2 entered long when the price broke from a 55 day high and entered short when the price broke from a 55 day low. Additional entries occurred as the price moved an additional 1/2 ATR (20 period) in their favor.
The Position Sizing method used in this system is called Percent Volatility that allows all markets to be traded equally by risk and volatility. Based on the 20 day ATR * 2 stop, only 2% account equity was at risk per position or in other words, if the stop is hit, you wouldn't lose more than the 2% risked. From the stop example below, if a long entry at $10 has a stop at $8, $2 would be at risk for every share if it were a stock purchase. If the account size is $10,000 and the risk per position is 2%, your risk would be $200. The $200 ($10,000 * 2%) divided by $2 (of ATR value if the stop is hit) would be a position of 100 shares. The position size is calculated in this manner of your risk divided by the value of the movement to the stop.
From the entry price, stops were set at 2 times the 20 period ATR. Using an example of a long entry price of $10 with a 20 day ATR of $1, the stop would be set at $8. Changing the example to a short position, the stop would be set at $12.
Exit occurs when the price touches or passes the opposite price channel. A long position exits when the price exceeds a prior low and a short position exits when the price exceeds a prior high. The Turtle System 1 exited a long position when the price broke the 10 day low and exited a short position when the price broke the 10 day high. The Turtle System 2 exited a long position when the price broke the 20 day low and exited a short position when the price broke the 20 day high.
To reduce whipsaws, add additional filtering to the entry. An example is the Donchian Filter system that adds a moving average filter to the Price Channel breakout. While avoiding curve fitting, find a good balance of entry period, exit period, and stop values to keep the system tight enough to profit while allowing the market enough room for its daily noise. The Turtles used this system in the futures markets on a daily timeframe however with good trending markets, this strategy could be used in other timeframes and instruments.
The full Turtle story with the rules, background, where the participants ended up and performance figures can be found in Michael Covel's book,
The Complete Turtle Trader.
Backtest this system in
MetaTrader 4 for free on the MQL Market.
Backtest this system in
MetaTrader 5 for free on the MQL Market.
Find backtesting spreadsheets at www.TrendFollowingWorks.com using the Turtle systems 1 and 2 . These spreadsheets let you dig into the numbers with Stock, Forex and Futures backtests or you can enter your own historical data. Change variables to see the resulting equity line and drawdown charts.
YOU ASSUME ALL RISK ASSOCIATED WITH INVESTMENT DECISIONS MADE ON THE BASIS OF INFORMATION CONTAINED ON THIS WEBSITE. TRADING IS SPECULATIVE IN NATURE AND NOT APPROPRIATE FOR ALL INVESTORS. INVESTORS SHOULD ONLY USE RISK CAPITAL THAT THEY ARE PREPARED TO LOSE AS THERE ALWAYS EXISTS THE RISK OF SUBSTANTIAL LOSS. INVESTORS SHOULD FULLY EXAMINE THEIR OWN PERSONAL FINANCIAL SITUATION BEFORE TRADING. SYSTEMS ON THIS SITE ARE EDUCATIONAL EXAMPLES AND ARE NOT RECOMMENDATIONS TO BUY OR SELL. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.