The Turtle Soup' pattern typifies the basic testing concept in swing trading, It is a volatile pattern with the potential for substantial gains. It is definitely not as easy to trade as it looks, but the reversals that follow through indicate a potential change in trend of significant duration, and a very tight risk point is predefined.
Before looking at the rules for this pattern, let's talk about its background. In the 1980s, a group of traders known as the Turtles used a system that basically employed a 20-day breakout of prices. A four-week price breakout was also earlier popularized by Richard Donchian as a standard trend following strategy. If prices made a new 20-day high, one would buy; if prices made a new 20-day low, one would sell. It tends to work in the long run if traded on a large basket of markets because there are high odds that something unusual will occur in a market somewhere, such as a Persian Gulf War (crude oil), or a freeze (coffee). The system is very dependent on capturing an extraordinary event or significant trend. However it also tends to have very large drawdowns and a low win-loss ratio due to the significant number of false breakouts. This is where the Turtle Soup opportunity lies!
The name of this strategy should not be construed as disrespect for the Turtles or anyone trading the turtle system. Some friends humorously called this pattern Turtle Soup, and the name has stuck.
Our method is to identify those times when a breakout is false and to climb aboard for the reversal. Many times, when the market is trending strongly, the false breakouts will be short lived. However, a handful of times the reversals are intermediate- to long-term trend reversals that lead to spectacular gains.
Like every other strategy presented in this manual, this is not a mechanical system. The trade must be managed according to the money management rules outlined in the preceding chapter. Due to the liveliness of the market action around these 20~day high and low points, you should watch for them to set up so as to anticipate the volatility and subsequent trading opportunity.
Here are the rules:
FOR BUYS (SELLS ARE REVERSED)
1. Today must make a new 20-day low-the lower the better.
2. The previous 20-day low must have occurred at least four trading sessions earlier. This is very important.
3. After the market falls below the prior 20-day low, place an entry buy stop 5-10 ticks above the previous 20-day low. This buy stop is good for today only.
4. If the buy stop is filled, immediately place an initial good-till -canceled sell stop-loss one tick under today's low.
5. As the position becomes profitable, use a trailing stop to prevent giving back profits. Some of these trades will last two to three hours and some will last a few days. Due to the volatility and the noise at these 20-day high and low points, each market behaves differently.
6. Re-entry Rule: If you are stopped out on either day one or day two of the trade, you may re-enter on a buy Stop at your original entry price level (day one and day two only). By doing this, you should increase your profitability by a small amount.
Let's look at a handful of examples from 1995.
EXHIBIT 4.1 S&P—December 1995
EXHIBIT 4.1 S&P—December 1995
596.00 595.00 594.00 593.00 592.00 591.00 590.00 589.00 588.00 587.00 586.00 585.00 584.00 583.00 582.00 581.00 580.00 579.00 ■578.00 : 577.00 i 576.00 575.00 574.00 573.00 572.00 i 571.00 Day
1. On September 29, the market makes a new 20-period high and reverses. The previous 20-day high was 592.25, made on September 20, which is at least four previous trading sessions from today. We go short at 592.00, five ticks under the September 20 high. Our initial protective stop is placed at 592.65, one tick above today's high.
2. The market trades to as low as 582.00 two days later. A trailing stop assures us of locking in a large portion of the profits.
3. October 10, a 20-period low and a reversal. The previous 20-day low was made on September 27 at 579.20. Our buy stop placed five ticks above the September 27 low is filled and we are long. An initial protective sell stop is placed at 575.45, one tick below today's low. As the position becomes profitable, we will of course, move our stop up quickly.
4. The market rallies sharply over the next few trading sessions, taking the index to above the 591 level, 12 points above our entry.
5. A losing trade. The market makes a new 20-period high and reverses. We are filled at 592.35, five ticks under the previous 20~day high made on September 29. A protective buy stop is placed one tick above today's high of 593.40.
6. We are stopped out near the close for a loss of 1.05 points (plus slippage and commission).
7. A new 20-day low. The previous low was at least four trading sessions earlier. As the market reverses, we are filled five ticks above the October 10 low. Our sell stop is initially placed one tick below today's low.
8. The market rallies more than 16 points in five trading sessions!
1. July 7, 1995, bonds make a new 20-period high and reverse. The previous 20-day high was made at least four trading sessions earlier (6/23) at 115-30. We go short in the 115-25 range with a protective stop one tick above today's high of 116-06.
2. Bonds begin a gradual sell-off that leads to a parabolic drop on July 19. As we mentioned in our introduction, whenever this type of extended range move occurs, we tighten our stops since many times such price action signals the end of a move. In this example, bonds drop over five points from our entry point.
140.00 139.00 138.00 137.00 136.00 135.00 134.00 133.00 132.00 131.00 130.00 129.00 128.00 127.00 126.00 125.00 124.00 123.00 122.00 121.00 120.00 119.00 118.00 117.00 116.00
1. October 30, 1995, a new 20-period low and reversal_ The previous low was made at least four trading sessions earlier on October 19 at 120.80. We go long in the 121.05 area with a protective stop at 119.95, one tick below today's low.
2. The market rallies more than 10 cents in a week.
1. Hewlett-Packard makes a new 20-period low and reverses. The previous 20-period low was made at least four trading sessions earlier. We go long in the 72 1/2 area. (Please note for equities-we enter a Turtle Soup set-up approximately 1/8 of a point below or above the 20-period high or low.) Our protective sell stop is placed 1/8 of a point under today's low of 711/2.
2. Over the next two weeks, HWP rallies more than 15 percent.
1.2550 1.2500 1.2450 1.2400 1.2350 1.2300 1.2250 1.2200 1.2150 1.2100 1.2050 1.2000 1.1950 1.1900 1.1850 1.1800 1.1750 1.1700 1.1650 1.1600 1.1550 1.1500 1.1450 1.1400 1.1350
1. A 20-period high. The previous 20-period high was made on May 8, which is at least four trading sessions earlier. After the market makes a new high, it reverses under the May 8 high and we are short Our protective buy stop is initially placed at 123.26, one tick above today's high.
2. A parabolic drop to under 119. When we see this type of sharp sell-off, we tighten our stops immediately to assure locking in our profit
1. The market makes a new 20-period high and reverses. The previous 20-period high is at least four trading sessions earlier.
2. A very sharp sell-off- (Please note that this is where trading this pattern becomes difficult.) On March 14, the market opens approximately 12 points(!) under our fill from two days earlier. As you can see, it immediately rallies sharply higher. It would be imprudent to allow such a large profit to dissipate. Even though the sell-off resumed over the next few days, it is safe to assume we would be out of the position.
1.640 1.630 1.620 1.610 1.600 1.590 1.580 1.570 1.560 1.550 1.540 1.530 1.520 1.510 1.500 1.490 1.480 1.470 1.460 1.450 1.440 1.430 1.420 1.410 1.400 1.390
1. August 3, 1995, natural gas makes a 20-period low and reverses. Our buy stop is filled in the 1.400 range and our initial protective sell-stop is placed one tick below today's low.
2. The market rallies sharply taking prices to above the 1.570 area within six trading sessions.
Larry, how did you come up with the Turtle Soup strategy? LARRY.
It came about over a matter of time. I attempted (unsuccessfully) to trade breakouts of momentum growth stocks as taught by William O'Neill in Investors Business Daily. 1 was frustrated, though, at how many times I got stopped out before a big move occurred. And being a short-term, high percentage trader I didn't enjoy the drawdowns. Also, I had read the Turtles' methodology and learned their system was also plagued by false breakouts.
So, you created a methodology to take advantage of the false breakouts. LARRY.
That's right. It is a structured method to trade failure tests. One of the drawbacks of this pattern though, is that you will have periods where you can get a large number of 20day highs/lows that do not reverse. This is time consuming and frustrating. On average, though, about 15-20 trades across 30 futures markets will occur per month. I also look for this pattern on equities.
It appears you're not the only one looking at these points. My office has monitored these levels for years. What do you advise people to do about the volatility?
This strategy requires rigid stop methods. Many times you are entering markets that are going through strong trending periods and after a short correction, the trend continues.
So, you trade this method for only a few days?
Yes, and this is where it gets subjective. This setup has the potential for longer-term, spectacular gains. Because I trade on a short-term horizon, though, I never fully participate in these larger moves. I am comfortable taking a good profit for a few days' work. Those individuals with longer term time frames may want to look at this setup as one that can occasionally provide them with substantial profits. This can also be done with options, but that is not what I do.
Are you saying then that as your position becomes more profitable over a few days, your stops become tighter and tighter?
Exactly. I am looking to lock in profits whenever possible. I don't look back and concern myself whether or not I missed an eventual big move.
Now let's look at the Turtle Soup Plus One pattern.
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