As a beginner to the futures trading world, it would put light years to your learning if you know any popular trading system that has worked in the past.
Most of the futures trading systems that are being sold by system vendors that “promised to make you rich” are modifications of these popular trading systems.
Most Popular Trading System
The Turtle trading system is very well known in the futures trading community. Almost every system trader start their system design journey with this system.
It was made popular from a debate between 2 traders, Richard Donchian and Bill Eckhardt, on whether profitable traders can be trained or must be naturally talented for a start. Richard won the bet when his group of trading newbies made $100 million using his Turtle trading system.
Turtle Trading Rules
The rules are as follows:
Buy only when the price exceeds the highest of the past 20 days – at one tick above the highest high of the last 20 days.
Sell only when the price exceeds the lowest of the past 20 days - at one tick below the lowest low of the last 20 days.
They are applied to the following 21 futures markets, covering bonds, hard and soft commodities, currencies and stock indexes:
- 30 Year US Treasury Bond (CBOT)
- 10 Year US Treasury Note (CBOT)
- Coffee (NYSE)
- Cocoa (NYSE)
- Sugar (NYSE)
- Cotton (NYSE)
- Swiss Franc (CME)
- Deutschmark (CME)
- British Pound (CME)
- French Franc (CME)
- Japanese Yen (CME)
- Canadian Dollar (CME)
- S&P 500 Stock Index (CME)
- Eurodollar (CME)
- 90 Day US Treasury Bill (CME)
- Gold (COMEX)
- Silver (COMEX)
- Copper (COMEX)
- Crude Oil (NYMEX)
- Heating Oil (NYMEX)
- Unleaded Gas (NYMEX)
Countering the Turtle System
As more people have came to know of this system and became successful with it, there are variations such as entering on the highest or lowest of the past 19 days, 18 days, etc., just to be one step ahead of the pure Turtle traders. Others have decided to sell when a Turtle buy signal is triggered and to buy when a Turtle sell signal is triggered.
The “Turtle Soup Method” as written in Street Smarts: High Probability Short-Term Trading Strategies describes this counter strategy very well.
Why the Turtle System Worked
The Turtle system is a good example of a channel breakout system. The channel is formed a follows:
For any futures price charts, imagine you start at the X+1 day on the left, and draw a line for the highest high for the past X days. Similarly, draw a line for the lowest low for the past X days. Continue to the right of the chart until the highest high or the lowest low is breached. Then you draw a new line.
This is an illustration of the 20 day channel with the Aussie Dollar price chart. The white lines are the borders of the channel:
The breakout of the channel means that a longer term price trend is starting and also a good time to get into a buying or selling position, that you can ride on for significant profits.
For example, you could have bought at 1.0212, 1.0580 and 1.0784, or you could have sold at 1.0500. Looking at the subsequent movement from trading breakouts indicated by this popular trading system, there are lots of money to be made.