If you are a previous visitor to this blog, you’ll know this is one place where you can find the Mechanical System Rules for the Turtle Trading System. There you will note that the basic stop loss is calculated by adding or subtracting 2 X the 15 to 20 day average true range (ATR) to or from your initial entry price.
In other words, if the 20 day ATR is 1 and your entry price is 100, your stop loss for a long position would be 98, and your stop loss for a short position would be 102.
The question is this…is this the best stop loss for the system?
In an effort to answer that question, I decided to conduct a simple test with Turtle System 2 by testing four different stop losses. The system entry signal is a 55 day high or low, and the system exit is a 20 day low for a long position and a 20 day high for a short position.
The four stop losses are simply 1 x ATR, 2ATR, 3ATR and 4ATR.
I ran the test across a portfolio of 61 liquid futures markets, a starting equity of $10 million, and a 25 year time period. I also employed a commission of $10 per round turn, and slippage of $50 per contract.
The results were as follows:
Stop Loss % Wins Compounded ROR Worst Drawdown Sharpe Ratio
1ATR 22.1% 6.2% 62.7% .32
2ATR 32.2% 11.6% 67% .45
3ATR 36.6% 11.6% 69.4% .45
4ATR 38.2% 12% 73% .46
As you can see, employing a much tighter stop of just 1ATR does not work out too well. Not only is the percentage of winners much lower, but the compounded rate of return drops significantly. The reason is that employing this stop results in too many transactions and it is the transaction costs that really eat into the profits.
Otherwise, the results for the other three stop losses are quite similar. Naturally, the percentage of winners will go up when you employ a wider stop loss, but apparently, so does the drawdown in the case of this system.
Regardless, it’s apparent that Richard Dennis and William Eckhardt had a pretty good idea of what they were doing when they designed this system. Unfortunately, the markets haven’t cooperated very well in more recent years as a deflationary environment has resulted in fewer trends in commodity markets.
With that in mind, individual traders may be wise to try and find some alternative strategies for exploiting trends. Recently, I’ve found a new site that is exploring some ideas… The College of Trading. Have a look.