Way of the turtle

One Brick at a Time
Let’s begin with a survey of many common trend-following build-
ing blocks, including the ones we were taught in the Turtle pro-
gram. These are ways to determine when a trend may be starting
and when it may have ended. This is not a complete survey: You
can find entire books that do nothing more than outline different
indicators and system rules that can be used to build trend-follow-
ing systems. For other types of trading there are other types of build-
ing blocks that may be useful. Since this book is not a
comprehensive treatise, however, I’ll leave the discovery of those
tools as an exercise for the reader. The building blocks discussed in
this chapter are the following:
• Breakouts: These are situations when the price exceeds the
highest high or the lowest low for a specific number of days.
This was the primary tool used in the original Turtle system.
• Moving averages: These are continuously calculated
averages of the price for a specific number of days. They are
called moving averages because they are calculated each
day and their value therefore moves up and down with the
new prices.
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Way of the Turtle

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• Volatility channels: These are built by adding a specific
amount of price to a moving average that is based on a
measure of market volatility such as the standard deviation
or ATR.
• Time-based exits: These are the simplest possible exits: You
exit the market at a specific, predetermined time (e.g., exit
the market after 10 days or after 80 days).
• Simple lookbacks: These involve a comparison of the
current price with a historical price at some earlier period.
We will explore each building block in more detail and demon-
strate how it can be used in a trend-following system.