Turtle Stops
The
Turtles used N-based stops to avoid large losses in equity.
T
here is an
expression that, "There are old traders; and there are bold traders; but there
are no old bold traders." Traders that
don’t use stops go broke. The Turtles always used stops.
For most people, it is
far easier to cling to the hope that a losing trade will turn around than it is
to simply get out of a losing position
and admit that the trade did not work out.
Let us make one thing
very clear. Getting out of a losing position is absolutely critical. Traders
who do not cut their losses will not be
successful in the long term. Almost all of the examples of trading that got out
of control and jeopardized the health
of the financial institution itself, such as Barings, Long-term Capital
Management, and others, involved trades
that were allowed to develop into large losses because they were not cut short
when they were small losses. The most
important thing about cutting your losses is to have predefined the point where you will get out, before you
enter a position. If the market moves to your price, you must get out, no exceptions, every single time. Wavering from
this method will eventually result in disaster.
Turtle Stops
Having stops didn’t mean
that the Turtles always had actual stop orders placed with the broker.
Since the Turtles
carried such large positions, we did not want to reveal our positions or our
trading strategies by placing stop
orders with brokers. Instead, we were encouraged to have a particular price,
which when hit, would cause us to exit
our positions using either limit orders, or market orders.
These stops were non-negotiable
exits. If a particular commodity traded at the stop price, then the position
was exited; each time, every time, without fail.
Stop Placement
The Turtles placed their
stops based on position risk. No trade could incur more than 2% risk.
Since 1 N of price
movement represented 1% of Account Equity, the maximum stop that would allow 2%
risk would be 2 N of price movement.
Turtle stops were set at 2 N below the entry for long positions, and 2 N above the entry for short positions. In
order to keep total position risk at a minimum, if additional units were added, the stops for earlier units were
raised by Ð’Ð… N. This generally meant that all the stops for the entire
position would be placed at 2 N from the most recently added unit.
However, in cases where
later units were placed at larger spacing either because of fast markets
causing skid, or because of opening
gaps, there would be differences in the stops.
For example:
Crude
Oil
N = 1.20
55 day breakout = 28.30
Entry Price Stop
First Unit 28.30 25.90
Entry Price Stop
First Unit 28.30 26.50
Second Unit 28.90 26.50
Entry Price Stop
First Unit 28.30 27.10
Second Unit 28.90 27.10
Third Unit 29.50 27.10
Entry Price Stop
First Unit 28.30 27.70
Second Unit 28.90 27.70
Third Unit 29.50 27.70
Fourth Unit 30.10 27.70
Case where fourth unit was added at
a higher price because the market opened gapping up to 30.80:
Entry Price Stop
First Unit 28.30 27.70
Second Unit 28.90 27.70
Third
Unit 29.50 27.70
Fourth
Unit 30.80 28.40
Alternate Stop Strategy – The Whipsaw
The Turtles were told of
an alternate stop strategy that resulted in better profitability, but that was
harder to execute because it incurred
many more losses, which resulted in a lower win/loss ratio. This strategy was
called the Whipsaw.
Instead of taking a 2%
risk on each trade, the stops were placed at Ð’Ð… N for Ð’Ð…% account
risk. If a given Unit was stopped out,
the Unit would be re-entered if the market reached the original entry price. A few
Turtles traded this method with good
success.
The Whipsaw also had the
added benefit of not requiring the movement of stops for earlier Units as new
Units were added, since the total risk
would never exceed 2% at the maximum four Units.
For example, using
Whipsaw stops, the Crude Oil entry stops would be:
Crude
Oil
N = 1.20
55 day breakout = 28.30
Entry Price Stop
First Unit 28.30 27.70
Entry Price Stop
First Unit 28.30 27.70
Second Unit 28.90 28.30
Entry Price Stop
First Unit 28.30 27.70
Second Unit 28.90 28.30
Third Unit 29.50 28.90
Entry Price Stop
First Unit 28.30 27.70
Second Unit 28.90 28.30
Third Unit 29.50 28.90
Fourth Unit 30.10 29.50
Benefits of the Turtle System Stops
Since the Turtle’s stops
were based on N, they adjusted to the volatility of the markets. More volatile
markets would have wider stops, but
they would also have fewer contracts per Unit. This equalized the risk across
all entries and resulted in better
diversification and a more robust risk management.
Category: Methods of technical analysis
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