What Is Turtle Trading & Does It Work for the Crypto Market?

Investors have been developing new strategies to guide their trading decisions for hundreds of years. Over time, new strategies are developed, intriguing investors searching for the right tool that allows them to corner the market and bring in high returns. 

One such strategy involves "turtle trading," which was first developed in the early 1980s and has since become popular among investors of all experience levels. Before you consider implementing this strategy, let’s learn more about how it works and whether it can be used for the crypto market.

What Is Turtle Trading?

Turtle trading is a strategy traders can use to take advantage of sustained momentum in trading markets. The goal is to follow set rules on making trades that limit the role of emotions during your decision-making process.

This strategy has been employed across a wide range of different financial markets. Traders who use this strategy attempt to find breakouts among various assets regardless of the price movement (up or down).

The turtle trading experiment was developed primarily by Richard Dennis along with assistance from William Eckhardt. Dennis trained 14 separate "turtles" on how to follow rules — instead of using their “gut feelings” when making decisions. The methodology behind this experiment, as well as the results that occurred, would lead to the development of turtle trading as a legitimate decision-making strategy.

The Turtle Trading Experiment

Turtle trading’s extensive experiment began in the early 1980s. It was created by two commodity traders who wanted a more effective futures markets trading strategy. Here's a closer look at the origins of the turtle trading experiment, as well as how the experiment ended.

The Origin of Turtle Trading Experiment

In the early 1980s, Richard Dennis was already an established commodity trader who had garnered a considerable amount of success. When he first started out, in the early 1970s, it's said that he borrowed $1,600 to make investments and reportedly earned $350 million in just six years. Dennis and his trading partner, William Eckhardt, would routinely discuss their success with commodity trading, and how to improve it.

Dennis believed that any individual could effectively be taught how to trade on the futures markets. On the other hand, Eckhardt believed that Dennis had a talent that allowed him to be successful as a commodity trader and to profit from his profession. Dennis decided to settle the debate by creating an experiment to prove his hypothesis.

The Turtle Trading Experiment

The turtle experiment acquired its name after Dennis referred to his students as "turtles.” After a two-week training period during which he taught his students the rules associated with his trading system, he provided participants with his own money. The purpose of the experiment was to impart new investors with a completely mechanical technique for making investments.

Dennis’s rules were designed to assist traders in removing emotion from their decisions. The underlying concept behind both experiment and methodology was to ensure that traders would base their decisions solely on predetermined rules, without taking any other factors into account.

While Dennis knew that he could place all of these rules into a newspaper article, he understood that only a small number of traders would actually adhere to them. His many years of experience in the industry had shown him that the majority of traders only use trading rules to provide some basic structure, before “improvising” whenever they considered it necessary.

However, Dennis believed that not following these rules in a rigid manner would produce poor trading performance. The experiment was set to last for a period of two weeks. Dennis named his students "turtles" because of an experience he’d had visiting turtle farms when in Singapore. He believed that, just like turtles, traders could be grown quickly and efficiently.

The Results

Formal results from this experiment — which continued for five years — weren't published. However, a former "turtle" named Russell Sands, who died in 2019, had stated that the two separate classes of turtles whom Dennis trained earned over $175 million in a period of five years. The takeaway is that even first-time traders who had no previous experience with the market could learn how to trade effectively and ultimately become successful traders.

Some of the “turtles” were asked to leave the experiment, but of those who were able to rigorously follow the prescribed strategies, there were notable successes. Jerry Parker, a “turtle” who even now practices the system’s precepts, still manages Chesapeake Capital after founding it over 30 years ago.

Even though modern investors can't be given personal training by Dennis (who, incidentally, is still politically active and president of Dennis Trading Group Inc.), the rules he established can be applied when making trades. The main goal again is to purchase breakouts and eventually close on trades whenever prices begin to drop or rise.

Although turtle trading resulted in some success for traders who were part of the experiment, there are some issues to be aware of before you begin to use it for crypto trades. The primary one is that sizable drawdowns are common when using this trading technique.

The majority of breakouts that investors place their money into are false movements, which can lead to investors losing on a high number of trades. The potential for high returns is still possible for investors who understand that drawdowns will happen.

How Does Turtle Trading Work?

There are a large number of rules that must be followed when using the turtle trading technique. However, the original turtle trading rules have been modified over the years. Even though the initial strategy of identifying possible breakouts is still somewhat effective, modern traders have modified these rules in order to more effectively identify trends.

For instance, the previous rules stated that an investor should only enter the market when the price goes above the 20-day high. The modified rules prescribe buying whenever the price goes higher than the 200-day high. Turtle trading doesn't work much differently when used to make crypto trades and investments versus stocks, bonds and futures.

Turtles only trade in highly liquid markets, which yields more market depth to mitigate risks and reduce potential losses. When employing the turtle trading strategy, make sure that you focus your attention on the most popular crypto assets. 

The following section explains the rules behind turtle trading in detail.

Markets Traded

During the experiment, the turtles traded various futures contracts with the goal of making trades in highly liquid markets. This approach was meant to provide traders with the ability to move the market without necessarily making a sizable order. Along with commodities, turtles traded metals, bonds, the S&P 500, FX and energy.

Position-Sizing

Position-sizing is an algorithm that effectively normalizes the volatility of the set position by altering how sizable the trade is based on the current market volatility. The purpose of this system is to enhance diversification by making sure that every position in each market is the exact same size.

Highly liquid markets will have fewer contracts traded. At the same time, markets that are less liquid will trade many more contracts. The position-sizing system assesses the 20-day moving average for the true range to determine how volatile the market currently is.

Entries

Turtles ended up using two completely different entry systems when making trades. As mentioned previously, these systems have been modified over the years. The first of the two entry systems involved using a basic 20-day breakout. The second system used a 55-day breakout.

Winning positions were added with a maximum of four entries. Turtles were told directly by Dennis to take all signals that were offered, because of the knowledge that missing just one signal could result in a large winner being overlooked. Missing a big winner could substantially reduce total returns.

Stop Losses

Turtles were told to take advantage of stop-losses whenever necessary to make sure that losses never went too high. An important aspect of the stop-loss strategy was that the turtles needed to determine what their exact stop-loss was before entering a position. The intention here was for risk to be defined before even making a trade, allowing the turtles to mitigate losses. (Investments in more volatile markets, such as crypto, involve wider stops.)

Exits

As for exits, turtle trading rules state that leaving a position earlier than normal could limit the potential returns from the trade, which is a mistake that regularly occurs with other trend-following systems. Turtles used two separate trading systems, which resulted in two exit rules.

The first exit rule involved a 10-day low when taking long positions into account, as well as a 20-day high for any shorts. In comparison, the second system used a standard 20-day low or high. The price was watched in real time, as opposed to using stop-exit orders.

Tactics

Turtles were also taught by Dennis how to use limit orders while dealing with any quick-moving markets. Another tactic involved waiting for relative calm before placing a new order — as opposed to trying to quickly obtain the best price, which is a mistake that many new traders make. Turtles were told to purchase in the strongest markets, while also selling in the weakest ones, in order to benefit from momentum.

Key Lessons Learned From Turtle Trading

Over the years, traders of all experience levels have learned the ins and outs of turtle trading, which has allowed investors to take away some key lessons. While the initial turtle trading rules have been modified to account for current trading standards, traders still use the principles behind turtle trading when making trading decisions.

Understand the Concept Behind Your Trading Strategy

Whether you use the turtle trading method in the crypto market or decide to use a completely different strategy, it's essential that you comprehend every facet of the concept behind the strategy, as well as the logic of the rules it’s based on.

Once you truly understand the concept, you should be able to implement more than one trading strategy around it, which helps to diversify risk. Without knowing what the trading strategy actually means, you'll likely stop using it after the first drawdown occurs since you won't know how to correct this issue.

Manage Risks

Even if the turtle trading strategy works for you when conducting crypto trades, you may still incur high losses if you don't develop a risk management strategy as well. Let's say that you're using the modified turtle strategy that produces a return of more than 32% and a drawdown of more than 41.50%. If the risk per trade is just 1%, you're in a relatively manageable position.

Investors who don't use a risk management strategy could decide to increase risk to around 4%. In this scenario, the annual returns would be just under 76%. However, the max drawdown would be around 97%. If this drawdown ever occurs, it would be practically impossible for you to recover from it. The takeaway here is that any trading strategy should be paired with risk management techniques.

Adapt to Changing Market Conditions

Market conditions invariably change on a regular basis within the crypto industry, which means you may not be successful using the same trading strategy at all times. Eventually, this strategy will likely result in an extended period of drawdown. It's also possible that a trading strategy will no longer work at all, which can put you in a difficult situation.

If you find that your trading strategy no longer works, there are several steps you can take. First, determine whether the concept behind your strategy has failed — or the actual strategy no longer works. In the event that the strategy is all that’s failed, you can retool it around that concept for an improved approach to trading.

If you find that the concept behind your strategy no longer produces results, you’ll want to change to a completely new trading concept, instead of attempting to salvage the one you currently use. Once you've moved to another concept, start creating new strategies around it.

Plan Your Entry and Exit

Plan your exit, just as you plan your initial entry. Know exactly when you’ll either exit with your profits or cut your losses.

Does Turtle Trading Work for Crypto Markets?

Over the years, many traders have used the turtle trading strategy on crypto markets. The results haven't been great. When following the initial turtle trading system from the early 1980s, it's difficult to obtain high profits. However, the modified rules mentioned previously have resulted in more profits, since trades are made less frequently.

When looking at previous results, shorting isn't a great option in cryptocurrency markets. When taking the turtle trading rules into account, shorting doesn't provide many benefits and can lead to capital loss when making numerous stop-losses throughout a bull run.

One reason why the initial turtle trading system isn't perfect for crypto is because it was meant to be used with loosely correlated markets. Cryptocurrency assets have relatively high correlation in regard to price. If you want to use the turtle trading strategy when making crypto trades, the modifications you should implement include the following:

• Use the moving average approach for your entries and exits.

• Experiment with various time frequencies, which could include 30 minutes, four hours or six hours worth of trading data.

• Experiment with various stop placements, which could involve placing stops at three above or below the entry for a long position.

• Experiment with how you allocate equity with the turtle trading strategies you employ.

Are Turtle Trading Rules Worth Trying?

Every crypto trader wants to find the perfect strategy that will net them high returns when trading crypto. While you might make the right trades at the right times, the turtle trading rules mentioned earlier aren't necessarily perfect for everyone. Beginners and experts alike should be able to use the turtle trading strategy without much issue.

However, the results can vary depending on your approach and the level of risk you take on, which means that it will take time for you to identify if turtle trading is right for you. It's true that many of the "turtles" who first took part in the turtle trading experiment garnered an ample amount of success.

On the other hand, Dennis himself incurred exceedingly high losses in the stock market crash of 1987, which means that this isn't an infallible strategy. Regardless of the trading system you decide to use, it's highly recommended that you have a strong basis for each trading decision you end up making.

The Bottom Line

Turtle trading is a unique strategy that gives traders the opportunity to explore making investment decisions without putting any emotion into their decisions, which may result in a successful approach to trading. Since the turtle trading experiment took place in the early 1980s, the rules behind this strategy have been modified. Take this reality into account before you decide to implement this strategy with your trades.