The legendary story of the Turtle Trades. Pretty intriguing isn't it? If you don't know about the Turtles and the story behind them, you can read here. My question always was, are the mechanical systems that they used still valid today? Are those systems still profitable? Are they applicable to Forex?
The Turtles traded several markets with 2 systems (System 1 and System 2). These systems didn't have any discretionary rule. Everything, from entries to exits, position sizing to money management, everything was clearly established to the very last detail. This document is the most comprehensive guide I have seen about the Turtle Trading Methods and I used all that information to automate System 2 in Metatrader. I automated System 2 first as it is simpler to program. My plan is to eventually do the same thing with System 1. Let's see if System 2 still works and if it is applicable to the Forex markets, in particular the EUR/USD pair.
The system uses the daily timeframe and the rules are surprisingly simple. These are the rules for entering Long positions:
- Buy when the current price is higher that any other high in the previous 55 days.
- Put a Stop loss 2 Average True Ranges away from the entry (by using the ATR the system is flexible to current volatility. When the volatility is higher the Stop Loss will be set farther away and viceversa). The ATR used is evaluated over 20 days. So ATR(20).
- Don't put any Target Profit on the orders. The goal is to let them run as far as possible in your favor.
- Dynamically calculate position size so that if Stop Loss is hit you only lose 2% of the account. So, if you have a farther away Stop Loss, the positions size will be smaller, and viceversa.
- Once inside the trade, if price moves in your favor by half the ATR, then add another long trade. And you do this until you have a maximum of 4 open trades in the same direction.
- Every time a trade is entered, move up the Stop Loss of the existing trades, to the same price of the Stop Loss calculated for the new trade just entered.
- Exit all the trades when the current price is the lowest price of the last 20 days (This may happen at a profit or a loss). Or exit when Stop Loss is hit.
Pretty simple system but incredibly powerful. Also mentally hard to trade. Buying at a 55 day high is tough as that's the point where most traders think the move is done and start fearing a reversal. Same for shorts when you initiate a short position at the 55 day low. Entries are definitely hard to digest psychologically speaking. Exits are even harder. Waiting for the price to reach the lowest point of the last 20 days is painful while you inevitably watch part of your profits evaporate. But this is the best way to ride a trend as far as possible without arbitrary target profits that cut your winners short. This mechanism allows the strategy to ride monster trends once in a while that skyrocket profits.
I ran a mathematical expectancy analysis of the entries and verified that both Short and Long entry signals have a significant positive edge. This is good as a first step to trust the system. Then I coded the rest of the strategy and started to have fun with back tests.
Here's the result of the back test for the EURUSD currency pair from January 1, 2000 to November 14, 2012 (Fully trust worthy paid data from AlpariUK obtained through direct request to the broker). The spread used was 2 pips which is worse than what most brokers offer today.
(Click on image to enlarge)
Some more statistics:
Average Annual Return: 13.19%
Ulcer index: 12.06
Sharpe ratio (Compared to S&P500): 0.70
Martin ratio (Compared to S&P500): 0.89
This performance easily beats the returns of audited professional Forex traders reported on the Barclay Currency Traders Index. A high Ulcer Index of 12.06 reveals what we already know: The system is hard to trade. But who said profitable trading was easy? Also, the Turtle trader must be patient as he will not be trading every single day. The system can stay inactive for weeks waiting for the expected Donchian Channel Breakouts in either direction.
Some further optimizations
The Turtles applied this method using the 55 & 20 days combination to all the markets they traded. The system was not optimized for specific instruments. It is more of a "universal", a "fit all" approach, which is great because it exploits a more universal market inefficiency that seems to work across multiple instruments. It is a more fundamental occurrence and therefore you would assume it is a market inefficiency that is harder to disappear. But that doesn't mean the parameter selection can not be improved for specific markets and that's what I wanted to do for the EURUSD pair.
First I ran an Optimization test to make sure that the Parameters space provides good results even though parameters were drastically changed.
Once I was confident the Parameters space was that wide and good, I ran a Rank Analysis for the parameters selection. The idea is to obtain the parameters that yields the most stable draw down values and the most stable yearly returns. It looks like the 70 day entry with an 8 day reversal exit is the most stable parameter set, which offers the most stable draw-down values yer after year along with the most stable returns. Here's the back test using the 70 & 8 combination.
(Click on image to enlarge)
Average Annual Return: 18.33%
Maximum Drow-Down: 15.67% in 13 years
Ulcer index: 8.98
Sharpe ratio (Compared to S&P500): 0.74
Martin ratio (Compared to S&P500): 1.77
This is, in my opinion, a far superior version. The essence of the system hasn't been changed. We simply came up with parameters that consistently deliver superior results and that are likely to be profitable going forward regardless of market mutations.
If you think this trading system can be a good addition to your trading arsenal, consider the purchase of the Expert Advisor for only $67. Much less than what is typically charged for unprofitable, over curve-fitted unprofessional EAs out there that can't survive a month of live trading. As part of the purchase you get an Installation and Configuration guide, plus my personal support setting it all up if needed.
Expert Advisor and Pdf Guide $80
Beyond any doubt, the Turtles Trading System 2 has a positive edge. It is profitable and applicable to the Forex markets (you can test it on other currency pairs as well). Although profitable, the method is psychologically hard to trade. The hardest part is letting profits run indefinitely without a predefined profit target. That factor explains why some Turtles were not profitable in spite of the fact that they were all taught the same system. Letting your profits run, as originally sated is what ultimately separates the great Forex traders from the amateur ones.
Thanks for your interest. I hope you enjoyed this article and I also hope that if you make the Turtle Trading System EA part of your trading arsenal, you can benefit from it. For any inquiries and support of any kind feel free to contact me at firstname.lastname@example.org.
As a proof that Long term Profitable automated trading is possible, the Turtles Trading system continues to deliver good results after this document was written. +35.6% in 2014, +22.8% in 2015 Read the articles below for more details:
Results - 2014
Results - 2015
Results - 2016
LT Trend Sniper - a Forex strategy that works
Impatient Sniper - A Profitable Gold Trading Strategy
Design of a EURUSD Donchian breakout strategy with proven statistical edge
Forex Rebellion doesn't work
Forex Cash Cow. Review and Expert Advisor
Amazing Crossover System. Expert Advisor
How to measure a system's edge
An expectancy analysis of Regular MACD Divergences for the EURUSD currency pair