The typical trader thinks mostly in terms of the entry signals when thinking about a particular trading system. They believe that the entry is the most important aspect of any trading system.
They might be very surprised to find that the Turtles used a very simple entry system based on the Channel Breakout systems taught by Richard Donchian.
The Turtles were given rules for two different but related breakout systems we called System 1 and System 2. We were given full discretion to allocate as much of our equity to either system as we wanted. Some of us chose to trade all our equity using System 2, some chose to use a 50% System 1, 50% System 2 split, while others chose different mixes.
System 1 – A shorter-term system based on a 20-day breakout
System 2 – A simpler long-term system based on a 55-day breakout.
A breakout is defined as the price exceeding the high or low of a particular number of days. Thus a 20-day breakout would be defined as exceeding the high or low of the preceding 20 days.
Turtles always traded at the breakout when it was exceeded during the day, and did not wait until the daily close or the open of the following day. In the case of opening gaps, the Turtles would enter positions on the open if a market opened through the price of the breakout.
System 1 Entry – Turtles entered positions when the price exceeded by a single tick the high or low of the preceding 20 days. If the price exceeded the 20-day high, then the Turtles would buy one Unit to initiate a long position in the corresponding commodity. If the price dropped one tick below the low of the last 20-days, the Turtles would sell one Unit to initiate a short position.
System 1 breakout entry signals would be ignored if the last breakout would have resulted in a winning trade. NOTE: For the purposes of this test, the last breakout was considered the last breakout in the particular commodity irrespective of whether or not that particular breakout was actually taken, or was skipped because of this rule. This breakout would be considered a losing breakout if the price subsequent to the date of the breakout moved 2N against the position before a profitable 10-day exit occurred. The direction of the last breakout was irrelevant to this rule. Thus, a losing long breakout or a losing short breakout would enable the subsequent new breakout to be taken as a valid entry, regardless of its direction (long or short). However, in the event that a System 1 entry breakout was skipped because the previous trade had been a winner, an entry would be made at the 55-day breakout to
avoid missing major moves. This 55-day breakout was considered the Failsafe
At any given point, if you were out of the market, there would always be some price which would trigger a short entry and another different and higher price which would trigger a long entry. If the last breakout was a loser, then the entry signal would be closer to the current price (i.e. the 20 day breakout), than if it had been a winner, in which case the entry signal would likely be farther away, at the 55 day breakout.
System 2 Entry – Entered when the price exceeded by a single tick the high or low of the preceding 55 days. If the price exceeded the 55 day high, then the Turtles would buy one Unit to initiate a long position in the corresponding commodity. If the price dropped one tick below the low of the last 55 days, the Turtles would sell one Unit to initiate a short position.
All breakouts for System 2 would be taken whether the previous breakout had been a winner or not.
Turtles entered single Unit long positions at the breakouts and added to those positions at ½ N intervals following their initial entry. This ½ N interval was based on the actual fill price of the previous order. So if an initial breakout order slipped by ½ N, then the new order would be 1 full N past the breakout to account for the ½ N slippage, plus the normal ½ N unit add interval.
This would continue right up to the maximum permitted number of units. If the market moved quickly enough it was possible to add the maximum four Units in a single day.
N = 2.50
55 day breakout = 310
First Unit added 310.00
Second Unit 310.00 + ½ 2.50 or 311.25
Third Unit 311.25 + ½ 2.50 or 312.50
Fourth Unit 312.50 + ½ 2.50 or 313.75
N = 1.20
55 day breakout = 28.30
First Unit added 28.30
Second Unit 28.30 + ½ 1.20 or 28.90
Third Unit 28.90 + ½ 1.20 or 29.50
Fourth Unit 29.50 + ½ 1.20 or 30.10
The Turtles were told to be very consistent in taking entry signals, because most of the profits in a given year might come from only two or three large winning trades. If a signal was skipped or missed, this could greatly affect the returns for the year.
The Turtles with the best trading records consistently applied the entry rules. The Turtles with the worst records, and all those who were dropped from the program, failed to consistently enter positions when the rules indicated.