Turtle Soup

Typically, my system ideas come from observing the market. Other times, they come from fading conventional logic. For example, while reading the book Trend Following by Michael Covel...I ran across the classic Donchian 5-20 moving average crossover system. For those not familiar with this system it's fairly simple:

• If the 5 day moving average crosses above the 20 day moving average...go long;
• If the 5 day moving average crosses below the 20 day moving average...close your long and go short.

Richard Donchian actually had a few more rules for this system...but you get the idea. His point was to get in on the big trends and capture the meat of the move. Of course, the downside to this system was a choppy, trendless market would kill you. And most likely cause you to give up on the system just before another big move occurred. Ha ha!

The key to this type of system is position sizing and diversifying your trade vehicles enough that when one is choppy another one might be trending.

So, back to trading system ideas. I periodically test these classic well known systems against the American markets just to see if things have changed. And in the process of testing this 5-20 moving average system last weekend...I decided to reverse the rules. Instead of buying when the 5 day moving average crossed above the 20...I went long when the 5 day crossed below the 20. The results were quite amazing.

This reminds me of Linda Raschke's Turtle Soup system. Richard Dennis trained several traders on Donchian's classic four-week breakout system. These group of traders were called Turtles by Dennis. These Turtles would go long the security the next day following a new four-week high. Linda figured out that all the buying from these Turtles would create a quick initial run-up in the price of the security. After the initial wave of buying...prices would quickly drop back down. And Linda would fade the move...short the Turtles...hence the name Turtle Soup.

Daily System Updates

Current open system positions:

• 2 QQQ long systems with current profit of 3.38%;
• CVT long with current loss of -1.18%;

Tomorrow's the big day, Fed meeting. Now, if I could only get off my butt and create a system to trade the Fed.

Until then...