Donchian Channel Strategy like The Turtles TradersThe Turtle Traders strategy is a legendary trend-following system developed by Richard Dennis and William Eckhardt in the 1980s to prove that trading could be taught systematically to novices. Dennis, a successful commodities trader, bet Eckhardt that he could train a group of beginners—nicknamed "Turtles"—to trade profitably using strict rules. The experiment worked, with the Turtles reportedly earning over $100 million collectively. Here’s a detailed breakdown of their strategy, focusing on the core components as documented in public sources like Curtis Faith’s Way of the Turtle and other accounts from the era.
Core Philosophy
Trend Following: The Turtles aimed to capture large price trends in any direction (up or down) across diverse markets—commodities, currencies, bonds, and later stocks.
Systematic Rules: Every decision—entry, exit, position size—was predefined. No discretion allowed.
Volatility-Based: Risk and position sizing adjusted to each market’s volatility, not fixed dollar amounts.
Long-Term Focus: They targeted multi-month trends, ignoring short-term noise.
Two Trading Systems
The Turtles used two complementary breakout systems—System 1 (shorter-term) and System 2 (longer-term). They’d trade both simultaneously across a portfolio of markets.
System 1: Shorter-Term Breakout
Entry:
Buy when the price breaks above the 20-day high (highest high of the past 20 days).
Sell short when the price breaks below the 20-day low.
Skip the trade if the prior breakout (within 20 days) was profitable—avoid whipsaws after a winning move.
Initial Stop Loss:
Exit longs if the price drops 2N below entry (N = 20-day Average True Range, a volatility measure).
Exit shorts if the price rises 2N above entry.
Example: Entry at $100, N = $2, stop at $96 for a long.
Trailing Stop:
Exit longs if the price breaks below the 10-day low.
Exit shorts if the price breaks above the 10-day high.
Time Frame: Aimed for trends lasting weeks to a couple of months.
System 2: Longer-Term Breakout
Entry:
Buy when the price breaks above the 55-day high.
Sell short when the price breaks below the 55-day low.
No skip rule—take every breakout, even after a winner.
Initial Stop Loss:
Same as System 1: 2N below entry for longs, 2N above for shorts.
Trailing Stop:
Exit longs if the price breaks below the 20-day low.
Exit shorts if the price breaks above the 20-day high.
Time Frame: Targeted trends lasting several months (e.g., 6-12 months).
Position Sizing
Volatility (N): N, or “noise,” was the 20-day Average True Range (ATR)—the average daily price movement. It normalized risk across markets.
Unit Size:
Risk 1% of account equity per trade, adjusted by N.
Formula: Units = (1% of Account) / (N × Dollar Value per Point).
Example: $1M account, 1% = $10,000. Corn N = 0.5 cents, $50 per point. Units = $10,000 / (0.5 × $50) = 400 contracts.
Scaling In: Add positions as the trend confirms:
Long: Add 1 unit every ½N above entry (e.g., entry $100, N = $2, add at $101, $102, etc.).
Short: Add every ½N below entry.
Max 4 units per breakout, 12 units total per market across systems.
Risk Management
Portfolio Limits:
Max 4 units in a single market (e.g., corn).
Max 10 units in closely correlated markets (e.g., grains).
Max 12 units in one direction (long or short) across all markets.
Stop Loss: The 2N stop capped risk per unit. If N widened after entry, the stop stayed fixed unless manually adjusted (rare).
Drawdown Rule: If account dropped 10%, cut position sizes by 20% until recovery.
Markets Traded
Commodities: Corn, soybeans, wheat, coffee, cocoa, sugar, cotton, crude oil, heating oil, unleaded gas.
Currencies: Swiss franc, Deutschmark, British pound, yen.
Bonds: U.S. Treasury bonds, 90-day T-bills.
Metals: Gold, silver, copper.
Diversification across 20-30 markets ensured uncorrelated trends.
