Turtle Trading Rules

Chapter 17 Turtle Blocks

Don't worship those fantasy tools in magazines all day long. Learning how to use the most basic tools is the first priority.What matters is not how powerful your tools are, but whether you can use them well.

We have been talking about the various states of the market: steady calm, steady volatility, calm trend, choppy trend.I also said that it is very important to identify the state of the market, because there are many systems that require the state of the market.If the state of the market is not good for the system, you must stay away from these markets.

Some tools are used to indicate the state of the market, I call them building blocks (building blocks).Certain blocks have their own unique names, like indicators, oscillators, or ratios, but I'm used to lumping them all together.This chapter is about the building blocks of a trend following system.Such tools are used to indicate changes in the state of the market: when to move from a stable state to a trending state, and when to return to a stable state from a trending state.Simply put, they can indicate when a trend may have started and when it may have ended.

Unfortunately, for traders, there are no building blocks that can do everything, no mysterious formula that can easily create wealth.At best, these tools can only help us determine the probability that the trend has started or ended.But for us, that's enough, because even if the odds are only slightly in our favor, we can make money with that edge (just ask the casino owners).

Common Trend Following Building Blocks

First, let's go over the many common trend following building blocks, including those we learned about in Project Turtle.These methods can be used to determine whether a trend is forming and whether it has ended.Not all building blocks will be covered here - you can definitely find treatises on the subject and learn about the various indicators and system laws that can be used to build a trend following system.There are other types of building blocks for other types of trading strategies.But this book is not the kind of monograph that covers everything, so readers may wish to study these tools for themselves as an exercise.This chapter will introduce the following building blocks:

Breakout: A breakout is when the price breaks through the highest or lowest level for a specified period of time in the past.This is the primary tool of the vanilla Turtle system.

Moving average price (moving average): refers to the average price within a specific period of time calculated continuously.They are called moving averages because they are recalculated every day, rising or falling as the price changes on a new day.

Volatility channel: The volatility channel is equal to a moving average price plus a certain value, which is determined based on volatility indicators such as standard deviation or ATR.

Time-based exit: This is the simplest exit strategy—exit at a specific, predetermined time (such as after 10 or 80 days).

Simple lookback: compare the current price with an earlier historical price.

Let's talk about each building block in detail and see how they are used in a trend following system.

breakthrough
Earlier I mentioned how breakouts work and what their advantages are.A market making new highs is a strong signal that a trend may be starting.The time period used to calculate the highs and lows is different and can determine what kind of trend you will enter.A breakout point in the short term will indicate the possibility of a short-term trend, and a breakout point in the long-term will indicate the possibility of a long-term trend.Breakouts are especially effective when combined with other indicators of overall trends.For example, the Donchian trend system, which combines entry signals, exit signals and moving average prices to indicate the overall trend.

moving average price

A moving average is a continuously calculated average price over a specific period of time.The simplest type of average price is called a simple moving average, which is the average price over a specific number of days. The 10-day average closing price is the average closing price in the past 10 days, and the 70-day average high price is the average highest price in the past 70 days.

There are other slightly more complex moving average indicators, the most commonly used one is the exponential moving average.The calculation method of this average price is quite special: take a part of the average price of the previous day, and then combine it with a part of the current price.There are two EMAs in Figure 9-1: the 20-day EMA and the 70-day EMA.

As you can see, the 20-day moving average is more in line with the price action, and crossed the 6-day moving average from the bottom up in mid-June—indicating the start of an uptrend.This is a very common entry point: if the short-term moving average crosses the long-term moving average, enter with the trend.In this example, a long-term trend began at this crossing point in mid-June.

System designers and researchers have invented many different moving average indicators, but most of those increasingly complex content are not so effective in practical applications, and are more likely to cause curve fitting (curve fitting) and Unrealistic test results.We'll talk about this potential pitfall in more detail below.

Amplitude channel
A volatility channel can be a good indicator of the start of a trend.If the price exceeds the sum of a certain moving average and another certain value, it means that the price has an upward trend.In other words, it indicates that a trend may have started.We will be examining two systems based on volatility channels.

It can be seen that, except for falling out of the channel at the right end of the graph, the price stays in the channel most of the time.You can also see how the moving average slowly declines as the price declines.

Timed out

A simple timed exit strategy can be very useful and very efficient.It can help you avoid the decline caused by the exhaustion of the trend.This is because timed exits tend to precede declines rather than waiting for a moving average or a breakout (both of which are more closely tied to price action) to indicate that a decline has occurred.

brief review

If you think about trend-following strategies at a very basic level, you can even invent simpler ways of identifying underlying trends.One method that works well is to simply look back at the price levels some days ago.You can use this method in conjunction with a volatility indicator like ATR, for example, as long as the price exceeds the sum of the price 100 days ago plus 2ATR, you buy.

Over the years, hundreds of various indicators have been published.Recent advances in technology have made it easier for traders to program their own formulas and create their own indicators, and trading magazines feature new indicators and new systems based on them every issue.If you want to learn more about other indicators and system building blocks, you can search related resources.However, in order to prevent you from overindulging, I would like to give you a piece of advice.I use trend following as an example, but this advice applies to other trading strategies as well.

If a market starts to move up, sooner or later, no matter what trend-following system you use, it will trigger an entry signal.All blocks can be adjusted to speed up or slow down the reaction.So, you can actually build a system with any brick and it won't be that different from a system built with other bricks.

My advice is that instead of spending all day looking for those super indicators that are new, perfect, and invincible in the past market, it is better to spend your time in more meaningful places.I suggest you to try some simple system, such as using the simple system mentioned above.We'll talk about several of these systems in the next chapter.

(End of this chapter)