Some traders prefer to use breakout points to signal their trend entries, others prefer to use indicators which just show strong directional momentum. Who is right, and which works better?
The Turtle Traders
In the early 1980's, the famous trader Richard Dennis bet his partner that he could take raw recruits and turn them into very profitable traders by teaching them a fairly simple trading system. To cut a long story short, he was indeed able to recruit some novices, give them a system and capital, and watch them make spectacular profits over a period of a few years. For a long time, there was a lot of speculation about exactly what this superbly profitable trading strategy was. A few years ago, some of the original “Turtles” published the rules of the strategy that was given to them.
The Turtle Trading System
The heart of the system governing trade entries was to trade a range of instruments, entering long when a price made a 55 day high or short at a 55 day low: Donchian channel breakouts. Stop loss was simply a function of volatility, and were calculated by the instrument's average true range (ATR). It was a trend trading system.
It is generally believed that this kind of breakout system does not work well anymore, particularly in the Forex market where Forex breakouts very often become “fake-outs”. However I have been surprised to find from my own research that Turtles style trading can actually work very well in the Forex market, compared to more complex entry systems involving indicators, time of day etc.
Turtles Style Trading in Forex
As the Turtles traded a diverse range of markets, you would think that a key part of successfully applying their methods in the Forex market would be to trade all currency pairs equally. In fact, research shows that the USD is the key driver of the Forex market, and that USD currency pairs have a strong propensity to trend. This might well change in the future if the USD lost its role as the primary global currency, but for now it holds true. After the USD, the Euro is the next most strongly trending currency. So it is a good idea to only apply this trading strategy to USD currency pairs.
