Original Turtle Trading Rules: Chapter 7: Tactics

Miscellaneous guidelines to cover the r est of trading the Turtle System Rules.

The famous architect Mies van der Rohe, when speaking about restraint in design, once said: “God is in the details.” This is also true of trading systems.

There are some important details which remain that can make a significant difference in the profitability of your trading when using the Turtle Trading Rules.


Entering Orders

As has been mentioned before, Richard Dennis and William Eckhardt advised the Turtles not to use stops when placing orders. We were advised to watch the market and enter orders when the price hit our stop price.

We were also told that, in general, it was better to place limit orders instead of market orders. This is because limit orders offer a chance for better fills and less slippage than do market orders.

Any market has at all times a bid and an ask. The bid is the price that buyers are willing to buy at, and the ask is the price that sellers are willing to sell at. If at any time the bid price becomes higher than the ask price, trading takes place. A market order will always fill at the bid or ask when there is sufficient volume, and sometimes at a worse price for larger orders.

Typically, there is a certain amount of relatively random price movement that occurs, which is sometimes known as the bounce. The idea behind using limit orders is to place your order at the lower end of the bounce, instead of simply placing a market order. A limit order will not move the market if it is a small order, and it will almost always move it less if it is a larger order.

It takes some skill to be able to determine the best price for a limit order, but with practice, you should be able to get better fills using limit orders placed near the market than with market orders.


Fast Markets

At times, the market moves very quickly through the order prices, and if you place a limit order it simply won’t get filled. During fast market conditions, a market can move thousands of dollars per contract in just a few minutes.

During these times, the Turtles were advised not to panic, and to wait for the market to trade and stabilize before placing their orders.

Most beginning traders find this hard to do. They panic and place market orders. Invariably they do this at the worst possible time, and frequently end up trading on the high or low of the day, at the worst possible price.

In a fast market, liquidity temporarily dries up. In the case of a rising fast market, sellers stop selling and hold out for a higher price, and they will not re-commence selling until after the price stops moving up. In this scenario, the asks rise considerably, and the spread between bid and ask widens.

Buyers are now forced to pay much higher prices as sellers continue raising their asks, and the price eventually moves so far and so fast that new sellers come into the market, causing the price to stabilize, and often to quickly reverse and collapse partway back.

Market orders placed into a fast market usually end up getting filled at the highest price of the run-up, right at the point where the market begins to stabilize as new sellers come in.

As Turtles, we waited until some indication of at least a temporary price reversal before placing our orders, and this often resulted in much better fills than would have been achieved with a market order. If the market stabilized at a point which was past our stop price, then we would get out of the market, but we would do so without panicking.


Simultaneous Entry Signals

Many days as traders there was little market movement, and little for us to do besides monitor existing positions. We might go for days without placing a single order. Other days would be moderately busy, with signals occurring intermittently over the stretch of a few hours. In that case, we would simply take the trades as they came, until they reached the position limits for those markets.

Then there were days when it seemed like everything was happening at once, and we would go from no positions, to loaded, in a day or two. Often, this frantic pace was intensified by multiple signals in correlated markets.

This was especially true when the markets gapped open through the entry signals. You might have a gap opening entry signal in Crude Oil, Heating Oil and Unleaded Gas all on the same day. With futures contracts, it was also extremely common for many different months of the same market to signal at the same time.


Buy Strength – Sell Weakness

If the signals came all at once, we always bought the strongest markets and sold short the weakest markets in a group.

We would also only enter one unit in a single market at the same time. For instance, instead of buying February, March and April Heating Oil at the same time, we would pick the one contract month that was the strongest, and that had sufficient volume and liquidity.

This is very important! Within a correlated group, the best long positions are the strongest markets (which almost always outperform the weaker markets in the same group). Conversely, the biggest winning trades to the short side come from the weakest markets within a correlated group.

As Turtles, we used various measures to determine strength and weakness. The simplest and most common way was to simply look at the charts and figure out which one “looked” stronger (or weaker) by visual examination.

Some would determine how many N the price had advanced since the breakout, and buy the market that had moved the most (in terms of N).

Others would subtract the price 3 months ago from the current price and then divide by the current N to normalize across markets. The strongest markets had the highest values; the weakest markets the lowest.

Any of these approaches work well. The important thing is to have long positions in the strongest markets and short positions in the weakest markets.


Rolling Over Expiring Contracts

When futures contracts expire, there are two major factors that need to be considered before rolling over into a new contract.

First, there are many instances when the near months trend well, but the more distant contracts fail to display the same level of price movement. So don’t roll into a new contract unless its price action would have resulted in an existing position.

Second, contracts should be rolled before the volume and open interest in the expiring contract decline too much. How much is too much depends on the unit size. As a general rule, the Turtles rolled existing positions into the new contract month a few weeks before expiration, unless the (currently held) near month was performing significantly better than farther out contract months.


Finally

That concludes the Complete Turtle Trading System rules. As you are probably thinking, they are not very complicated.

But knowing these rules is not enough to make you rich. You have to be able to follow them.

Remember what Richard Dennis said: “I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.” – From Market Wizards, by Jack D. Schwager.

Perhaps the best evidence that this is true is the performance of the Turtles themselves; many of them did not make money. This was not because the rules didn’t work; it was because they could not and did not follow the rules. By virtue of this same fact, few who read this document will be successful trading the Turtle Trading Rules. Again; this is not because the rules don’t work. It is because the reader simply won’t have the confidence to follow them.

The Turtle rules are very difficult to follow because they depend on capturing relatively infrequent large trends. As a result, many months can pass between winning periods; at times even a year or two. During these periods it is easy to come up with reasons to doubt the system, and to stop following the rules:

What if the rules don’t work anymore? What if the markets have changed?

What if there is something important missing from the rules?

How can I be really sure that this works?


The Shep’s Trading Rule - “You can break the rules and get awaywith it. Eventually, the rules break you for not respecting them.” – From Zen in the Markets, by Edward A.Toppel

One member of the first Turtles class, who was fired from the program before the end of the first year, suspected early on that information had been intentionally withheld from the group, and eventually became convinced that there were hidden secrets which Rich would not reveal. This particular trader could not face up to the simple fact that his poor performance was due to his own doubts and insecurities, which resulted in his inability to follow the rules.

Another problem is the tendency to want to change the rules. Many of the Turtles, in an effort to reduce the risk of trading the system, changed the rules in subtle ways which sometimes had the opposite of the desired effect.

An example: Failing to enter positions as quickly as the rules specify (1 unit every ½ N). While this may seem like a more conservative approach, the reality could be that, for the type of entry system the Turtles used, adding to positions slowly might increase the chance that a retracement would hit the exit stops—resulting in losses—whereas a faster approach might allow the position to weather the retracement without the stops being hit. This subtle change could have a major impact on the profitability of the system during certain market conditions.

In order to build the level of confidence you will need to follow a trading system’s rules, whether it is the Turtle System, something similar, or a completely different system, it is imperative that you personally conduct research using historical trading data. It is not enough to hear from others that a system works; it is not enough to read the summary results from research conducted by others. You must do it yourself.

Get your hands dirty and get directly involved in the research. Dig into the trades, look at the daily equity logs, get very familiar with the way the system trades, and with the extent and frequency of the losses.

It is much easier to weather an 8 month losing period if you know that there have been many periods of equivalent length in the last 20 years. It will be much easier to add to positions quickly if you know that adding quickly is a key part of the profitability of the system.


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