1. Set stop-loss orders based on volatility.

Turtle Traders used stop losses based on volatility, meaning they determined their stop loss size based on the Average True Range (ATR) indicator. This also means that, for each trade, they use a different stop loss size in response to changing market conditions.

The charts below show why this stop loss method is so powerful.

Chart 1

Chart 2

Both charts show a breakout scenario with very different price dynamics.

While chart 1 shows very small bars and low ATR (low volatility), chart 2 shows bigger candlesticks and a higher ATR (high volatility) value.

What if the same stop-loss technique was used on both of these breakouts? Well, it wouldn't make any sense!

A trader should use a small stop loss for trade on chart 1 and a wider stop loss on chart 2 to take into account different market periods and price behavior.

At the same time, the broader take profit levels will be used for chart 2 to capture larger price moves, rather than for chart 1.

Simultaneous adjustment of the stop loss and take profit will also ensure that the R: R ratio remains relatively stable.

2. A position is up to 2% of the total account

Although the size of the stop loss (in pip distance) varies with each trade, the percentage of risk needs to be kept the same.

The maximum allowable risk (also known as position size) for any transaction should be 2% of the total current account balance.

The table below shows 2 examples of how Turtle Traders adjust their stop loss size and position based on volatility.

The numbers are for illustrative purposes only

Although the risk is the same (2% or $ 2,000), Turtl Traders must buy more contracts during lower volatility because the stop loss has been placed closer.

Always determine the stop loss distance first. Most amateur traders start by evaluating the number of contracts they want to buy and then placing a stop-loss order so they can reach their random risk target. Never start by thinking about how many contracts you want to buy/sell before knowing your stop loss.

3. Correlation and risks

If Turtle Traders wants to enter 2 positions on different instruments, they must first consider the correlation between the two markets.

A quick reminder: Correlations describe how two "similar" markets move. A positive correlation means that the 2 markets are moving in the same direction and a negative correlation means they are moving in the opposite direction.

Chart 3

Chart 4

The above two charts show two completely different scenarios:
  • In chart 3, you see 2 price charts with a very high positive correlation (the 2 charts are almost identical moving).
  • In chart 4, you see 2 price charts with a negative correlation (they move in opposite directions).
A trader who enters 2 orders in the same direction (2 buy orders or 2 sell orders) on positively correlated markets increases his risk because it is more likely that both ends the same.

A trader that engages in two orders in different directions (one buy and one sell) on instruments with negative correlation may (but not guarantee) the same results.

When trading positively correlated markets in the same direction, your risk increases.

When trading on negative-correlation markets in the same direction, you minimize your risk.

Turtle Traders didn't come up with this strategy, but it was used by professional traders, as long as the trade existed. It's the indisputable rule of how financial markets work and understanding the correlations is of great importance.

4. Add money to the winning position

Turtle Traders usually do not enter full position size at the first entry point.

Remember, they are only allowed 2% per trade, so they often split the order into multiple entry points and add money to a winning position.

Their first position will be 0.5% and after the trade starts to make a profit, they will add another 0.5%. They will continue talking until a maximum risk level of 2% is reached. At the same time, they shift the stop loss behind the price to protect their position.

The advantage of adding money to a winning trade is:
  1. You will limit your losses: The Turtle Traders strategy is a breakout and trend-following strategy. For a fake breakout, when the price reverses in an instant, they usually only have a very small and unscaled position. Therefore, the loss they take is only a fraction of the 2% maximum risk allowed.
  2. You can catch bold wins and defend your position: You will only reach your full position size through high-momentum breakouts and once you have reached the dark risk level. At most 2%, the initial stop-loss orders also need to be moved up to block some of the profits.
" You have to minimize your losses and try to preserve capital for those very few instances where you can make a lot of in a very short period of time. What you can't afford to do is throw away your capital on suboptimal trades "  - Richard Dennis

5. Adjust the position size throughout the chain of losses

Dennis and Eckhardt understand that the most important thing in a chain of losses is not how quickly you can cover your losses, but how much you can limit your losses.

The rule for them to limit drawdowns throughout the chain of losses shows this principle:

If your account is down 10%, then trade as if it were 20% off. If you lose $ 10,000, trade as if you have lost $ 20,000 and your account has only $ 80,000 left.

This means that, even though your current account has $ 90,000 left and 2% of your equity will be $ 1,800, you are only trading as if your account has $ 80,000 left with a maximum risk of $ 1,600.

This strategy will significantly reduce losses when the trader enters a series of significant losses and it also removes a lot of mental pressure.