Richard Dennis Trading Strategy | Turtle Trading Approach

Several strategies have emerged from the realm of trading financial markets. One that has been a distinguished approach to collecting incredible profits among different trader applicants is the Turtle Trading System. For cryptocurrencies, this is not a minor thing.

This approach sets the basis for a consistent implementation of trend trading strategies. Richard Dennis and William Eckhardt considered the trend the most complex part of a market. This article discloses the relevant concepts behind their system.

Who Is Turtle Trader: Innate Or Trained?

The Turtles were, first and foremost, 13 participants that Richard Dennis and his colleague William Eckhardt introduced in a trading program to demonstrate whether successful traders are born or trained.

The turtle traders needed to follow a structured system based on a trend-following strategy, strict risk management, and rules for entry and exit points. Along the way, these traders should avoid emotional biases and remain in control.

Trend-Following: Approaching The More Complex Part Of The Market

Richard Dennis and William Eckhardt recognized the complexity behind trending markets but also apprehended this condition as the most profitable to gain an edge over the market, especially in the long term.

The challenge during these markets relies on their intrinsic dynamics, such as moving between consolidation phases leading to ranges or short reversals known as pullbacks, causing traders to:

• Confuse and exit profitable trades earlier, leaving money on the table.
• Fall into counter-trend trading, accumulating losses or, even worse, holding and averaging losing positions with the hope that the market reverses eventually.

To overcome those pitfalls, the turtle system establishes strict rules for identifying, entering, and exiting trades. To accomplish those rules, the system makes use of:

• The Donchian Channel: An indicator to identify entries, exits, and the overall trend.
• The Average True Range (ATR): To determine the position size by measuring the market volatility.
• Stop-loss Orders: The primary rule and philosophy of Richard Dennis is always to use stop-loss and dispense with profit targets since the idea is to stay in trend as long as there are no signals of its end.

Additionally, as the best trends extend their movements for a prolonged period, traders may spot further opportunities to add more positions during winning trades. This technique was called "pyramiding" in the turtle approach.

Pyramiding

It aims to maximize profits during winning trades, increasing the initial position by adding extra positions while leveraging unrealized profits. It is essentially a compounding technique that requires effort from traders.

The Donchian Channel: Signals For Entry

It is a technical analysis tool that indicates the market volatility, expecting a price breakout. Similar to Bollinger Bands, it consists of upper and lower bands that expand and narrow according to market phase and momentum.

Turtle System uses this indicator for a short-term and long-term approach to obtain entry signals such as follows:

The Short-Term Way

• Buying on the breakout of the upper part of the channel if the last signal was a loss
• Selling on the breakout of the 20-day lower part if the last signal was a loss.

The Long-Term Way

1. Buy an order when the upper line of the 55-day channel is broken if you are not in the market.
2. Sell orders when the lower line of the 55-day channel is broken if you are not in the market.

Keys To Understand The Donchian Channel In The Turtle Approach

• The short-term way uses the 20-period Donchian channel to establish the price breakout.
• The short-term way represents rule 1 of the turtle approach. The entry requires a breakout over the 20-day high or low of the channel.
• The turtle approach also establishes that traders should skip the channel breakout if the last signal has been profitable.
• If the turtles skip the signal from the short-term way and the market continues trending, they then have to use another method to return to the market: the long-term way.
• The long-term way represents rule 2 based on the 55-day breakout. The focus is the same, but the analysis will consider the data from 55 days.
• Turtle traders use the long-term way when the 20-day fails on its signal, and the market continues trending.

The Exit Way

According to the turtle trading approach, traders will not exit positions until there are signals that the trend is ending.

For each term, there is a method for when the turns against the position:

• Short-term way: Exit long positions when the price breaks out of a 10-day low. Close short positions if the price strikes a 10-day high.
• Long-term way: Exit long positions when the price breaks out of a 20-day low. Exit short positions if the price advances over the 20-day high.

Average True Range: Stop Loss Calculation

As mentioned before, the use of stop-loss orders is crucial in Richard Dennis' approach. Although the turtle trading system carries strict rules, in this matter, it is versatile.

Here, the approach is to preserve the same risk per trade by adapting each position size to the market's volatile conditions. It means that in highly volatile markets, traders lower the position size. In less volatile circumstances, traders can assume larger positions.

For example:

• For a balance of $50000, 2% risk implies $1000 per trade.
• In highly volatile cases, the regular candle for a trade setup might exceed that 2% since the price moves further distances. In this case, traders should lower the exposure (for instance, buying fewer coins or contracts) to keep the risk-reward ratio.
• In less volatile conditions, the price moves narrow distances. In this case, traders may increase the exposure (for instance, buying more coins or contracts) to keep the risk-reward ratio.

Discipline And Emotional Control: The Key To Success

Ultimately, discipline and emotional control are the most valuable lessons. Sticking to a plan and following the rules explained in the prior sections sets the path to real success.

This way, traders avoid biases and trade expectedly using the turtle approach: logically and consistently.

Conclusion

The turtle trading approach provides traders of all levels with a structured system that integrates all-out aspects for a successful trend-following trading strategy.

This approach sets the use indicators, risk management concepts, entry and exit rules, and a reminder of discipline and emotional control as two key pillars for the correct system application.

In Altrady, you can start your turtle trading journey by using the Donchian Channel and ATR indicators alongside smart trading features. Sign up for a free trial account today.