Donchian Channel Strategy – Turtle Trading Rules Explained

Intro

To make a decision about whether to buy or sell a commodity, price data analysis is absolutely essential. One way of extracting the meaning from the numbers is by using the Donchian channel strategy. 

Donchian Channel Strategy

While the Donchian channel is not the best known, it should not be overlooked as it can help to effectively visualize price trends. It is also a relatively easy tool to use, which makes it perfect for beginners. It can help you to employ your overall trading tactics, such as the turtle trading system. If you are interested in using these techniques, you will need to find an online trading platform which supports them. 

Turtle Trading

The turtle trading system goes hand in hand with data analysis software such as the Donchian channel strategy because they both center around predicting future prices based on past and current trends. The Donchian channel plots the price movement across three lines. The top and bottom lines display the highest and lowest past values, while the centre line shows the current average. Then, applying a price channel (two horizontal lines charting the trajectory of the upper and lower price points), you can create a future price prediction. How accurate is this prediction? Here’s where the turtle trading strategy comes in. 

Richard Dennis wanted to prove anybody was capable of being a successful trader, as he had been. He chose 14 novices and taught them a simple set of trading rules to follow. Long story short, the group collectively earnt over $175 million in just 5 years. The system itself became a closely guarded secret for a long time after, but it has since been made available. At the very least, this experiment demonstrated how effective data tools, coupled with a clearly defined strategy, can be. 

Turtle Trading Rules

The original turtle trading rules are subject to strict copyright rules, but most of it has now fallen into the public domain. As previously mentioned, the key concept behind turtle trading is to recognize and utilize price trends, across all timescales (both long and short-term). It includes a lot of financial advice which may seem intuitive, such as invest more money when the market is less volatile and vice versa. You should also decide the price you are going to buy and sell your shares in advance. 

Interestingly, these rules advise you to place much more weight on market prices than news and other information pertaining to your asset. Traders are told not to invest more than 2% in any one stock and to accept there may be downturns in price before it turns a profit. If you want to learn about all the finer details of this system, you can find them in Michael Covel’s book, ‘The Complete TurtleTrader: The Legend, The Lessons, The Results’. Finally, you will need to use an excellent online brokerage platform, such as TradeOr, which can turn these strategies into realities. 

Conclusion

The turtle system has an impressive track record. You may not be able to replicate the results of the lucky participants of Richard Dennis’ trial, but there is still much we can learn and put into practice from their methodology. It acts as a positive endorsement of the Donchian channel strategy, which can help you determine the direction of price movement in an asset. Having a general game plan, whether you agree with all the turtle trading rules or not, is certainly a good idea. When you feel ready to put all this together and start trading, TradeOr is the perfect platform to accommodate these techniques.