The Core Turtle System: Mastering the 20-Day Donchian Channel Breakout

This article provides a deep explore the foundational Turtle Trading system, focusing on the 20-day Donchian Channel breakout. We will explore the specific rules for entry, exit, and trade management that made this system legendary.

Entry Rules

The primary entry signal for the core Turtle system is a breakout of the 20-day Donchian Channel. A buy signal is generated when the price closes above the upper band of the 20-day Donchian Channel. Conversely, a sell signal is generated when the price closes below the lower band of the 20-day Donchian Channel.

Exit Rules

Exits are just as important as entries. For long positions, the exit signal is a close below the 10-day low. For short positions, the exit signal is a close above the 10-day high. This allows the system to capture the majority of a trend while still protecting profits.

Profit Targets

The Turtle system does not use fixed profit targets. Instead, it is a trend-following system that aims to ride trends for as long as possible. The exit rules are designed to let winning trades run.

Stop Loss Placement

Initial stop loss is placed at 2 ATR (Average True Range) from the entry price. This is a volatility-based stop that adjusts to market conditions.

Position Sizing

Position sizing is a key component of the Turtle system. The size of a position is determined by the account size and the volatility of the market, measured by ATR. The formula is: Position Size = (1% of Account) / (ATR * Dollars per Point).*

Risk Management

Risk is managed through the 2% rule, where no single trade can risk more than 2% of the trading account. Additionally, the Turtles used a rule to reduce position size by 20% for every 10% drawdown in the account.

Trade Management

Winning trades are managed by adding to the position, a technique known as pyramiding. The Turtles would add to a position up to four times, with each addition being 1/2 ATR away from the previous entry.

Psychology

The Turtle system is designed to be purely mechanical, removing emotion from trading decisions. The biggest psychological challenge is to follow the rules consistently, even during periods of drawdown.