Trading system "Turtles"
Most traders use a mechanical trading system (MTS). This is no accident. Good MTS automates the entire process of trading. Such a system provides answers to all questions arising before the trader during trading. The system facilitates the trader to trade consistently because there is a set of rules that define exactly what to do. Mechanic Trade trader leaves room for argument. If you know that your system makes money for a long time interval, it is easier to take trade signals and trade according to the system during periods of losses. If you rely on your own opinions during the trading day, you may find that you are fearful just when it needs to be determined, and fearless, when we should be careful. If you have a working MTS and you follow it, your trade will be consistent despite the inner emotional tension that could arise due to a series of losses or big profit. Faith, consistency and discipline made a thorough testing of MTS - is the key to the success of a trader. Turtle Trading System was a complete trading system. Its rules cover all aspects of trade and in fact did not leave any questions for subjective decisions a trader. It had all the components of a complete trading system.
The components of a complete trading system, the system provides a complete solution of all issues necessary for successful trading:
• Markets - What to buy or sell
• Position Sizing - How much to buy or sell
• Inputs - When buying or selling
• Stops - When out of a losing position
• Outputs - When out of a winning position
• Tactics - How to buy or sell
Markets - What to buy or sell
The first decision - what to buy or sell, ie, which markets to trade. If you are trading on a small number of markets, then you greatly reduce your chances to get into the trend. At the same time you do not want to trade the markets with too low turnover and non-trend markets.
Position Sizing - How much to buy or sell
The decision about how much to buy or sell - certainly the most important thing, but it is often misunderstood by traders. The decision about how much to buy or sell affects both diversification and money management. Diversification - an attempt to spread risk across many financial instruments and to increase opportunities for successful transactions. To properly diversify requires making similar if not identical, rates on many different instruments. Money management is concerned with limiting rates so that you do not run out of money before they have any good trend. How much to buy or sell - is the single most important aspect of trading. Most novice traders are at risk too much on each trade, and greatly increase their chances of going bankrupt, even keeping the rest of the regular trading style.
Entries - When to buy or sell
The decision on when to buy or sell, often referred to as the decision on the entry. Automated trading systems generate trading signals input to determine the exact price and market conditions to enter the forex market.
Stops - When out of a losing position
Traders who do not trim their losses, will not succeed in the long run. The most important thing is to limit their losses - is to determine in advance the point where you go, before you open the position.
Exits - When to go from a winning position
Many "trading systems" that are sold as a complete trading strategy, not separately describe the rules out of a winning position. However, the question of when to exit from the vantage point - the key to the profitability of the system. Any trading system without a description of where to go from a winning position is not complete.
Trading Strategy - How to buy or sell
Once received by the trading signal, at the forefront of its execution tactics. This is especially true for large trades when entering and exiting positions can lead to adverse movements in prices or impact on the forex market.
Markets: The Turtle Trading System trading futures contracts on the best-known U.S. futures exchanges. Since we sold millions of dollars, we could not trade the markets with daily circulation of only a few hundred contracts, otherwise we would have moved the market warrants and it would be difficult to enter and exit positions without getting a big loss. Turtles traded only on the most liquid markets. Generally, the Turtles traded all liquid U.S. markets, except for grain and meat markets. Since Richard Dennis has traded on his account, he could not allow us to trade grain for him because it exceeded the size of the boundary position in the market. We have not sold the meat because of the corruption of traders in the trading pit. A few years after the dissolution of the Turtle FBI conducted an operation in the Chicago trading pit on the meat and indicted many traders of manipulating prices and other forms of corruption.
Below is a list of futures markets in which trading Turtles:
Chicago Board of Trade 30 Year US Treasury Bond 10 Year US Treasury Note
New York Coffee Cocoa and Sugar Exchange Coffee Cocoa Sugar Cotton
Chicago Mercantile Exchange Swiss Franc Deutschmark British Pound French Franc Japanese Yen Canadian Dollar S & P 500 Stock Index Eurodollar 90 Day US Treasury Bill
Comex Gold Silver Copper
New York Mercantile Exchange Crude Oil Heating Oil Unleaded Gas
Turtles were given discretion as to the choice of financial instruments from the list. However, if the trader has decided not to trade in a particular market, then he should not have to trade this market is not at all. We did not have to trade the markets consistently.
The size of the position
Position size - this is one of the most important but least understood component of the trading system. Turtles used a position sizing algorithm, which was very advanced for those days because it regulated the position size based on the volatility of the market, expressed in dollars. This means that this position has tended to increase or decrease in the day about the same amount in dollar terms (compared with positions in other markets), regardless of the volatility of a particular market.
This normalization of volatility is important because it means that the various transactions in different markets have the same chance to get a certain amount of profit (or a certain amount of loss).
This increased the efficiency of diversification of trade in different markets. Even if the volatility of the market was low, any significant trend resulted in a significant gain, as the Turtles had more contracts under this nizkovolatilnomu instrument.
Volatility - the meaning of N
Turtles used a concept that Richard Dennis and Bill Eckhardt called N, to represent the underlying volatility of a particular market.
N - this is just a 20-day exponential moving average of True Range (True Range), which is now more commonly known as ATR. Formally, N is the average daily range of motion specific market prices, taking into account the gaps at the opening. N measured in the same locations as the base contract.
Daily True Range is calculated as follows:
True Range = Maximum (H-L, H-PDC, PDC-L)
where:
H - current High (maximum price of the day) L - the current Low (minimum price of the day) PDC - yesterday's closing price (Previous Day's Close)
To calculate N using the following formula:
N = (19 x PDN + TR) / 20
where:
PDN - yesterday's N (Previous Day's N) TR - current daily True Range
Since this formula requires the value of yesterday's N, you should start with the 20-day simple average of True Range for the initial calculation.
Calculation of dollar volatility
The first step in establishing the size of the position was to determine the dollar volatility of the market (Market Dollar Volatility), represented by the volatility of the market price (determined by N). This sounds more complicated than it actually is. This is determined by a simple formula:
Dollar Volatility = N x Dollars per Point
(Dollars per Point - this is one pip price movement in dollars)
The size of the position, taking into account the volatility
Turtles were the positions of the parts, which we call units (Unit). The value of units is chosen so that 1 N represents 1% of the trading account (Account). Thus, the unit for a given market can be calculated using the following formula:
Unit = (1% of Account) / (Market Dollar Volatility)
or
Unit = (1% of Account) / (N x Dollars per Point)
Example
Heating Oil HO03H:
Consider the following prices, True Range values of N and the contract for fuel oil for March 2003.:
Date High Low Close True Range N
11/1/2002 0.7220 0.7124 0.7124 0.0096 0.0134
11/4/2002 0.7170 0.7073 0.7073 0.0097 0.0132
11/5/2002 0.7099 0.6923 0.6923 0.0176 0.0134
11/6/2002 0.6930 0.6800 0.6838 0.0130 0.0134
11/7/2002 0.6960 0.6736 0.6736 0.0224 0.0139
11/8/2002 0.6820 0.6706 0.6706 0.0114 0.0137
11/11/2002 0.6820 0.6710 0.6710 0.0114 0.0136
11/12/2002 0.6795 0.6720 0.6744 0.0085 0.0134
11/13/2002 0.6760 0.6550 0.6616 0.0210 0.0138
11/14/2002 0.6650 0.6585 0.6627 0.0065 0.0134
11/15/2002 0.6701 0.6620 0.6701 0.0081 0.0131
11/18/2002 0.6965 0.6750 0.6965 0.0264 0.0138
11/19/2002 0.7065 0.6944 0.6944 0.0121 0.0137
11/20/2002 0.7115 0.6944 0.7087 0.0171 0.0139
11/21/2002 0.7168 0.7100 0.7124 0.0081 0.0136
11/22/2002 0.7265 0.7120 0.7265 0.0145 0.0136
11/25/2002 0.7265 0.7098 0.7098 0.0167 0.0138
11/26/2002 0.7184 0.7110 0.7184 0.0086 0.0135
11/27/2002 0.7280 0.7200 0.7228 0.0096 0.0133
12/2/2002 0.7375 0.7227 0.7359 0.0148 0.0134
12/3/2002 0.7447 0.7310 0.7389 0.0137 0.0134
12/4/2002 0.7420 0.7140 0.7162 0.0280 0.0141
12/5/2002 0.7340 0.7207 0.7284 0.0178 0.0143
Calculation of unit on 06.12.2002 (using the value of N = 0.0141 from 12/04/2002) will be:
N = 0.0141 Account Size = $ 1,000,000 Dollars per Point = 42,000 (the contract for 42.000 gallons to the prices in dollars)
Unit Size = (0.01 x $ 1,000,000) / (0.0141 x 42,000) = 16.88
Since it is impossible to trade fractional number of contracts, this value should be truncated to 16 contracts. You may ask: "How often should I expect the value of N and the size of the unit?". Turtles for a table size of units and values of N for each of the traded futures was drawn up every Monday.
The Importance of Position Sizing
Diversification - an attempt to spread risk across many financial instruments and to increase opportunities for successful transactions. To properly diversify requires making similar if not identical, rates on different instruments.
Turtle System used market volatility to measure the risks inherent in each market. Then we used to build risk management positions with a constant amount of risk (or volatility). It has extended the useful effect of diversification and increased the likelihood that winning trades block the damage from losing.
Note that such diversification difficult to achieve using low trading capital. Consider the above example, if you use the account of $ 100,000. Unit size will be a single contract, since 1.688 is truncated to 1. For smaller accounts to diversify efficiency decreases dramatically.
Units as a measure of risk
As the Turtles used units as the basic unit of measurement positions, and because these units take into account the volatility risk, the unit was a measure of risk, and position, and a portfolio of positions. Turtles have given risk management rules, which limited the number of units that we can hold at any one time, at four different levels.
In fact, these rules control the overall risk, which could withstand a trader, and these limits minimized losses over long periods of loss-making, as well as during extraordinary price movements. For example, such an extraordinary movement was observed after the stock market crash in October 1987. U.S. Federal Reserve sharply lowered interest rates to support confidence in the stock market. Turtles were in long positions in eurodollar and Treasury bonds. Losses on the next day were enormous. In some cases, from 20% to 40% of the trading accounts were lost in one day. But those losses would have been higher without restrictions on the size of the position.
Limits were as follows:
One market - a maximum of 4 units on the market.
Well correlated markets - for well-correlated markets could be a maximum of 6 units in the same direction (ie, 6 units for purchase or 6 for sale). Well correlated markets are: fuel oil and crude oil, gold and silver, Swiss franc and doychmarka, treasury bills and Eurodollar, etc.
Poorly correlated markets - for poorly correlated markets could be a maximum of 10 units in one direction. Poorly correlated markets include: gold and copper, silver and copper, and many combinations of cereals that Turtle could not sell because of limitations in the size of positions.
One direction - Total maximum number of units in the same direction (long or short) was 12 units. Thus, theoretically, you could have 12 units to 12 units long and the short direction at the same time.
Inputs
Ordinary traders think mainly in terms of input trading signals when they think about a particular trading system. They believe that the entrance - the most important aspect of any trading system. They must have been surprised to find that the Turtles used a very simple system for input, based on the breakout channel - a variant of Richard Donchian (Richard Donchian).
Turtles were given the rules for two different but related breakthrough systems, which we called System 1 and System 2. We were given a free hand in the allocation of our resources between the two trading systems. Some of us have chosen to trade all the money for the Tsunami 2, some distributed through its system between 50% and 50%, some have chosen other options.
System 1 - A short-term system based on a 20-day breakout System 2 - A simple long-term system based on a 55-day breakout
Breakthroughs
The breakthrough is determined when the price goes beyond a certain high or low number of days. Thus, the 20-day break will be held at the output of overseas high or low the previous 20 days.
Turtles always traded at the break, when he came in during the day, without waiting for the closing of the day or the next opening. In case of opening a gap Turtles were in position at the opening, when the market opened with a breakthrough.
Login trading system 1 - Turtles were in position when the price exceeded by a single tick the high or low the previous 20 days. If the price exceeded the 20-day high, then the Turtles would buy a unit to initiate a long position in the relevant financial instrument. If the price dropped one tick below the 20-day low, then the Turtles would sell a unit to initiate a short position.
Trading signal at the input of the trading system a neglected, if the latest breakthrough has led to a profitable trade.
NOTE: To check this, the latest breakthrough was considered regardless of whether there was a real input into the position with or break this breakthrough has been missed because of this rule. It was believed that this breakthrough has led to losing the deal if the price after the break was 2N in the opposite direction to break through, before there was a lucrative 10-day yield. The direction of the last break is irrelevant to this rule. Thus, the "loss-making long" or "loss-making short" break-through allows you to enter a position at the next break, whether it be "long" or "short." However, when the breakout was skipped due to the fact that previous breakthrough was "profitable", the entrance will be on the 55-day breakout, so as not to miss a lot of traffic.
At any time, if you're out of the market, there is always a price above which the short position is opened and there is another, higher price at which the open long position. If the final breakthrough was unprofitable, the input signal will be closer to the current price (at the boundary of the 20-day channel) than if it was a profitable breakthrough. If the latest breakthrough was profitable, then the trading signal will be much further - to 55-day border of the channel.
Login trading system 2 - The Turtles were in position when the price exceeded by a single tick the high or low the previous 55 days. If the price exceeded the 55-day high, then the Turtles would buy a unit to initiate a long position in the relevant financial instrument. If the price dropped one tick below the 55-day low, then the Turtles would sell a unit to initiate a short position.
All the advances in trading strategies lead to the discovery of two positions, regardless of how the previous one was a breakthrough - profitable or not.
Adding units
The Turtles were a long position in one business unit at the break and increased the size of the open position after the price has passed a distance of 1 / 2 N from the initial entry point. This interval (1 / 2 N) is measured from the actual price of the previous order.
Thus, if the initial order is executed because of slippage at 1 / 2 N of breakthrough, the new order will be at a distance from the breakout 1N (1 / 2 N-slip interval plus 1 / 2 N to add a unit).
This may continue until the maximum allowable number of units. If the market moves quickly enough, you can add a maximum of four units in one day.
Example:
Gold N = 2.50 55-day break = 310
The first unit added 310.00 310.00 Second unit + 1 / 2 x 2.50 311.25 third or unit 311.25 + 1 / 2 x 2.50 or 312.50 312.50 Fourth unit + 1 / 2 x 2.50 or 313.75
Crude Oil N = 1.20 55-day break = 28.30
The first unit Second unit added 28.30 28.30 + 1 / 2 x 1.20 or 28.90 The third unit is 28.90 + 1 / 2 x 1.20 or 29.50 Fourth unit 29.50 + 1 / 2 x 1.20 or 30.10
The sequence of the Turtles were required to comply strictly with the input signals to trade, because most of the profits each year could bring 2-3 large profitable trades. If the signal was lost, it could seriously affect the financial performance of the year. Turtles with the best trading results consistently perform input trading signals. Turtles with worse results, as well as anyone who has been dismissed from the program, failed to consistently meet all the inputs, which prescribes the trading system.
Input orders
As mentioned above, Richard Dennis and William Eckhardt advised not to use Cherapaham stops, placing an order. We were advised to monitor the market and put warrants when the market reached our stop price.
We were also told that it is better to place limit orders instead of market prices. Because limit orders were given the chance to better performance and less slippage than the market. Usually the price makes small random fluctuations. The idea of using limit orders is to place an order (buy) at the bottom of these movements instead of placing a market order.
A limit order will not move the market if the order is small, and almost always it will move less than the market, if the order is large.
It requires some skill to determine the best price for a limit order, but in practice you can get the best performance of limit orders, located close to the market than at the market.
Fast Markets
Sometimes the market moves very quickly, and if you place a limit order, he simply can not be executed. During the rapid movement of the market can move thousands of dollars on a contract just a few minutes. In such cases, the Turtles were advised not to panic, and wait with placing orders until the market stabilizes. Most beginners find it difficult to perform. They panic and place market orders. They always do it in the worst time and often make deals on the worst price of the day.
On a fast market liquidity is temporarily reduced. In the case of a rapid rise in the market, sellers stop selling, and they will not renew it until the price increase will not stop. In this scenario, asci considerably raised, and the spread between the bid and Ascom expands. Buyers are now forced to pay a much higher price, while sellers continue to raise the price and the price eventually moves so far that it involves entry of new sellers, making the price stabilized and often revert back. Market orders placed on a fast market, usually performed on the highest price just to the point where prices begin to stabilize.
Turtle expected until there are signs of at least a temporary rollback prices before placing orders, and this often leads to better performance than it could have been done a market order. If the market has stabilized beyond our stop price, we got out of the market, but it did not panic.
Simultaneous input trading signals
There were days when the markets were small and the movement we have been tracking open positions only, without placing any new orders. There were days when signals emerged one after another few hours. In this case, we place orders in the order of trading signals. But there were days when it seemed that everything happens at once, and we increased the number of open positions from zero to the maximum allowable limit for 1-2 days. Often, this frantic pace was amplified by numerous signals in correlated markets. Especially when the markets opened with a gap, generating an input signal to trade. At the opening could simultaneously receive signals from crude oil, heating oil and unleaded gasoline. With regard to futures contracts, very often had the input signals at the same market under contracts with the different months of execution.
Buy strength - sell weakness
If the trading signals come together, we always bought the strongest markets and sold at the market low in the group. We are always included in a market by one unit. For example, instead of the simultaneous buying of February, March and April futures on oil, we chose one, the strongest contract that had sufficient volume and liquidity. It is very important! Inside the correlated group, the best long position - the strongest markets (which is always greater than the weaker markets in the same group). Conversely, the biggest winning trades in the short side there on the weakest markets in the correlated group.
Turtles used a variety of ways to measure the strengths and weaknesses of markets. The simplest and most common - it's just to look at the graphics and visually determine which one "looks" stronger or weaker. Some were determined as N was the price after the break and bought at the market where the price has moved a greater distance (in units of N). Other price subtracted 3-month-old from the current price and then divided by the current N for normalization. The strongest markets were the highest values, the weakest - the least. Any of these approaches works well.
The transition to a contract with another term of execution
When the futures contract expires, it is necessary to take into account two major factors in the transition to a more distant contract period of performance.
Firstly, it happens that the contract for the next month there is a good trend, and in more distant contract - no. So do not go to a new contract until the current contract gives the best result.
Secondly, another contract must go before the volume and open interest on the expiring contract fall heavily. How much - it depends on the size of the unit. As a rule, the Turtles switched to new contracts for several weeks prior to the expiration, unless the open-ended contract did not give much better results than more distant.
Conclusion
These are the rules of the trading system full of Turtles. They are not very complicated, but knowing these rules does not make you rich. You should be able to fulfill them.
Turtle system is very difficult to follow because its result depends on the setting of relatively infrequent large trends. As a result, many months may pass between the profitable periods, sometimes a year or two. During these periods may begin to doubt in the trading system and stop the execution of its rules. Many of the turtles in an attempt to reduce the risk of trading system rules have changed slightly, causing the opposite effect.
To increase the level of confidence you need to follow the rules of trade, whether it is a system of turtles or any other system. You personally have to make calculations based on historical data. It is not enough to hear from others that the system works. Enough to read the results of studies conducted by others. You must do it yourself.