Original Turtle Trading Rules: Chapter 5: Stops

The Turtles used N-based stops to avoid large losses in equity.

There is an expression that, “There are old traders; and there are bold traders; but there are no old bold traders.” Traders that don’t use stops go broke.

The Turtles always used stops.

For most people, it is far easier to cling to the hope that a losing trade will turn around than it is to simply get out of a losing position and admit that the trade did not work out.

Let us make one thing very clear. Getting out of a losing position is absolutely critical. Traders who do not cut their losses will not be successful in the long term. Almost all of the examples of trading that got out of control and jeopardized the health of the financial institution itself, such as Barings, Long-term Capital Management, and others, involved trades that were allowed to develop into large losses because they were not cut short when they were small losses.

The most important thing about cutting your losses is to have predefined the point where you will get out, before you enter a position. If the market moves to your price, you must get out, no exceptions, every single time. Wavering from this method will eventually result in disaster.


Turtle Stops

Having stops didn’t mean that the Turtles always had actual stop orders placed with the broker.

Since the Turtles carried such large positions, we did not want to reveal our positions or our trading strategies by placing stop orders with brokers. Instead, we were encouraged to have a particular price, which when hit, would cause us to exit our positions using either limit orders, or market orders.

These stops were non-negotiable exits. If a particular commodity traded at the stop price, then the position was exited; each time, every time, without fail.


Stop Placement

The Turtles placed their stops based on position risk. No trade could incur more than 2% risk.

Since 1 N of price movement represented 1% of Account Equity, the maximum stop that would allow 2% risk would be 2 N of price movement. Turtle stops were set at 2 N below the entry for long positions, and 2 N above the entry for short positions.

In order to keep total position risk at a minimum, if additional units were added, the stops for earlier units were raised by ½ N. This generally meant that all the stops for the entire position would be placed at 2 N from the most recently added unit. However, in cases where later units were placed at larger spacing either because of fast markets causing skid, or because of opening gaps, there would be differences in the stops.

For example:

Crude Oil
N = 1.20
55 day breakout = 28.30

Entry Price Stop
First Unit 28.30 25.90
Entry Price Stop
First Unit 28.30 26.50
Second Unit 28.90 26.50
Entry Price Stop
First Unit 28.30 27.10
Second Unit 28.90 27.10
Third Unit 29.50 27.10
Entry Price Stop
First Unit 28.30 27.70
Second Unit 28.90 27.70
Third Unit 29.50 27.70
Fourth Unit 30.10 27.70

Case where fourth unit was added at a higher price because the market opened gapping up to 30.80:

Entry Price Stop
First Unit 28.30 27.70
Second Unit 28.90 27.70
Third Unit 29.50 27.70
Fourth Unit 30.80 28.40


Alternate Stop Strategy – The Whipsaw

The Turtles were told of an alternate stop strategy that resulted in better profitability, but that was harder to execute because it incurred many more losses, which resulted in a lower win/loss ratio. This strategy was called the Whipsaw.

Instead of taking a 2% risk on each trade, the stops were placed at ½ N for ½% account risk. If a given Unit was stopped out, the Unit would be re-entered if the market reached the original entry price. A few Turtles traded this method with good success.

The Whipsaw also had the added benefit of not requiring the movement of stops for earlier Units as new Units were added, since the total risk would never exceed 2% at the maximum four Units.

For example, using Whipsaw stops, the Crude Oil entry stops would be:

Crude Oil
N = 1.20
55 day breakout = 28.30
Entry Price Stop
First Unit 28.30 27.70
Entry Price Stop
First Unit 28.30 27.70
Second Unit 28.90 28.30
Entry Price Stop
First Unit 28.30 27.70
Second Unit 28.90 28.30
Third Unit 29.50 28.90

Entry Price Stop
First Unit 28.30 27.70
Second Unit 28.90 28.30
Third Unit 29.50 28.90
Fourth Unit 30.10 29.50


Benefits of the Turtle System Stops

Since the Turtle’s stops were based on N, they adjusted to the volatility of the markets. More volatile markets would have wider stops, but they would also have fewer contracts per Unit. This equalized the risk across all entries and resulted in better diversification and a more robust risk management.



Original Turtle Trading Rules: Foreword
Original Turtle Trading Rules: Introduction
Original Turtle Trading Rules: Chapter 1: A Complete Trading System
Original Turtle Trading Rules: Chapter 2: Markets: What the Turtles Traded
Original Turtle Trading Rules: Chapter 3: Position Sizing
Original Turtle Trading Rules: Chapter 4: Entries
Original Turtle Trading Rules: Chapter 5: Stops
Original Turtle Trading Rules: Chapter 6: Exits
Original Turtle Trading Rules: Chapter 7: Tactics
Original Turtle Trading Rules: Chapter 8: Further Study