TL;DR: Open the trade in a recent price breakout, e.g. in a four-week interval. Then, close our position in a recent market breakout in the opposite direction, e.g. in a two-week interval.

Renowned trader Richard Dennis employed a simple yet effective strategy to turn $5,000 into $100 million. By adhering to the rules outlined with discipline, traders of all experience levels can achieve remarkable returns. Richard’s groundbreaking Turtle Experiment showcased the power of systematic trading, revolutionizing the way we approach the market. Read on to learn more about this strategy, and stay tuned for a bonus section at the end of the blog.

Background of the Turtle Experiment

During the 1970s and 1980s, Richard Dennis established himself as a highly successful commodities trader. Challenging the prevailing belief that successful traders possessed an innate talent, he believed that trading was a skill that could be taught.

In 1983, Dennis decided to put his theory to the test by recruiting and training a group of individuals. The objective was to determine whether anyone, with the right training and discipline, could consistently achieve profitability in the markets.

The Rule of Thumb

The strategy is deceptively simple. Richard harnessed the concept that “the trend is your friend,” advocating for buying futures that break out to the upside of trading ranges and selling short on downside breakouts, and vice versa. But how does one identify the entry and exit points?

Entry Strategy

For entry, we want to open the trade in a recent price breakout, e.g. in a four-week interval. To illustrate, let’s consider the USDJPY pair. Using TradingView, we activated the “Donchian Channel” indicator to identify the highest high and lowest low over a four-week period. We also utilized the TradeDots indicator as a confirmation signal for market reversals.

As depicted in the figure below, the pair reached a four-week higher high on March 11th, signaling a new price breakout for entry. Additionally, the TradeDots indicator confirmed a market bottom a few days prior. Consequently, we would opt to open a long contract after that day.

Exit Strategy

For exit, we want to close our position in a recent market breakout in the opposite direction, e.g. in a two-week interval. The currency pair continued to produce new price breakouts until a double top formed on May 9th. How do we determine when to exit? We switched the “Donchian Channel” indicator to a shorter two-week duration.

Three days after reaching an all-time high, the pair dropped to a two-week low on May 16th. The TradeDots indicator also indicated a market reversal pattern a few days earlier. As we should always trade with the market trend, we closed our positions on the same day, resulting in a substantial 9% return from this trade.

What other benefits does the TradeDots indicator offer? By identifying market reversal patterns based on observed market patterns and price actions, TradeDots provides more early opportunities compared to other market indicators.

In this case, TradeDots provided signals 3–4 bars earlier on both entry and exit. While the market does not always align perfectly with the indicator, traders can still utilize our signals to secure profits when their targets are met. The most optimal trade yielded nearly 15% returns, while a more conservative approach still resulted in a nearly 5% gain.

False Breakouts

It is important to note that while this significant win was preceded by several false four-week breakouts, traders must accept that there will be both wins and losses. Relying solely on a single indicator or strategy does not guarantee a 100% profitable outcome.

This is precisely why executing orders with discipline is crucial. Traders must not hesitate to cut losses, even if it means missing the ideal selling time. Overcoming the psychological aspect is the most challenging barrier.

Risk Management

While it would be ideal to consistently exit with substantial profits, but it is imperative to adopt a defensive strategy to prepare for scenarios where the market moves against us.

Richard introduced an additional liquidation (exit) rule into the formula, known as the 2N stop. If we are in a long position, a stop loss is placed 2N below the entry price. Conversely, if we are in a short position, the stop loss is placed 2N above the entry price.

To calculate N, we select the largest absolute number from the following three options:

1. The distance from today’s high to today’s low
2. The distance from yesterday’s close to today’s high
3. The distance from yesterday’s close to today’s low

TradingView offers the average true value indicator for reference.

Liquidation (Exit Rule):

• The 2N Stop
• The S1 or S2 breakout exits

Whichever of the above rules is triggered first, we must liquidate and close our position.

2% Rule

Traders should not risk more than 2% of their available capital on any single trade. For instance, if you are trading a 10,000 account and opt for a risk management stop loss of 2%, you can risk up to $200 on a given trade.

For example, a cotton futures contract (valued at $50 per cent) with an “N” of 5 cents carries a risk of $250 (5 cents x $50). If you received a cotton breakout signal (using a 2N stop), your “contract risk” would be $250 x 2, or $500.

Psychological Lessons for Traders

While the strategy may appear straightforward, why do traders continue to lose significant sums of money in trading contracts? The answer lies in the lack of discipline exhibited by many traders, as their emotions and psychological biases heavily influence their trading decisions. There are several lessons that every trader should internalize:

Never attempt to predict the market’s bottom or top

The goal is to capture the “middle” of a trend, which aligns with how we utilize the TradeDots indicator. Although the indicator identifies the most optimal buy/sell positions, it does not imply that users should always strive for the perfect entry point. It is impossible to predict the market’s next move accurately. No one never knows when the market will reverse. Therefore, traders are advised to adhere to the rules and system focusing on capturing the middle of the trend.

Be friends with losses

Jerry Parker, one of the turtle traders, once remarked, “..If you’re not making very much money, that’s fine. If you got a little loss, that’s fine. If you make a decent profit that turns into a loss, that’s fine. Just hold onto it and then really get aggressive when you’ve been rewarded by a big, huge profit.” Experiencing losses, even a series of losses, is common in trading. What matters is whether you believe in the system and continuously refine it with objective data to persevere until you are rewarded with significant profits. Unfortunately, many traders abandon the system and rely on their own decisions, resulting in more frequent and severe losses.

Focus on the next one

Traders cannot afford to disregard the second breakout simply because the first breakout resulted in a loss. They must get back on track. The second breakout may be the trade they were hoping for, and there is no way to predict it. The market can crush motivation and hope, but traders must adhere to the system’s stop losses and take profits. Research indicates that liquidations are far more critical than initiations. Knowing when to exit is paramount. Always exercise discipline.

In Conclusion

Richard Dennis’s Turtle Experiment showcased the power of a systematic approach to trading, proving that anyone, with the right training and discipline, can achieve remarkable success in the markets.

The key lies in executing trades with discipline, adhering to risk management principles, and overcoming psychological biases. If you have tried this method out, let us know the result and feel free to further discuss any trading topics with us through 0xtradedots@gmail.com

Bonus Section

TradeDots is a TradingView buy/sell indicator that identifies market reversal patterns through the implementation of quantitative investment strategies based on price actions and market patterns. We are now providing a 25% off and a 7-day FREE Trial for our newly subscribed users.

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About TradeDots

TradeDots is a TradingView indicator that identifies market reversal patterns through the implementation of quantitative trading algorithm on price actions. Try our 7-day FREE Trial to level up your trading game.

Set up your personalized trading alerts using our Telegram Bot, so you can now trade effortlessly without gluing to your screen. Join us now to experience TradeDots across all trading assets!

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Disclaimer: The information provided in this article is for educational purposes only and should not be considered as financial advice. Trading involves risk, and it is important to conduct thorough research and seek professional guidance before making any investment decisions. Prospective investors are encouraged to perform their own due diligence or consult a financial advisor before making investment decisions.