By Taro Hideyoshi
The critical piece of trading system is how to get out of a losing trade. Traders who do not cut their losses cannot be successful in long term.
The most important thing about stops that traders must keep in mind is to define the stops before enter a trade. This is of course not a coincidence that every famous trader has this trading rule in their trading system.
For the turtles, they did not place their stop with the brokers since they did not want to reveal their trading strategies. As they traded future contracts commodities, they used either limit orders or market orders instead.
No trade of turtles could incur more than 2% risk of equity. Because the turtles used N-based stops while N of price movement represented 1% of account equity, therefore the maximum stop allowed 2% risk would be 2N.
According to the entry rule of turtles, that a unit would be added into positions every 0.5N, the stops would be placed at 2N from the most recently added unit to minimize the total position risk.
Example
Crude Oil: N = 1.20, 55-days breakout = 28.30
In this case turtles would enter the first unit at 28.30. Then if price moved to 30.10 the positions of turtles would be as follow.
First Unit: entry [28.30] stop [27.70]
Second Unit: entry [28.90] stop [27.70]
Third Unit: entry [29.50 stop [27.70]
Fourth Unit: entry[ 30.10 stop [27.70]
The turtles were also told of an alternate stop strategy called the whipsaw. This strategy resulted in better profitability but incurred more losses, which resulted in lower win/loss ratio.
For this strategy, the stops were placed at 0.5N for 0.5% account risk. If a given unit was stopped out, it would be re-entered when the market reached the original entry price. Using of the whipsaw did not require moving the stops when a unit added. The maximum risk would not exceed 2% because the maximum unit is four.
Example
Crude Oil: N = 1.20, 55-days breakout = 28.30
In this case turtles would enter the first unit at 28.30. Then if price moved to 30.10 the positions of turtles would be as follow.
First Unit: entry [28.30] stop [27.70]
Second Unit: entry [28.90] stop [28.30]
Third Unit: entry [29.50] stop [28.90]
Fourth Unit: entry [30.10] stop [29.50]
Since the N in N-based stops was adjusted according to the volatility of markets, this resulted in better diversification and risk management.
About the Author
Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.
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