Breakout Filters: When to Skip Turtle Signals (and Why)

The original Turtle Trading rule was simple: Take every single signal. If the price hits the 20-day high, you buy. Even if the news is bad. Even if the chart looks "weird." Even if your gut says "no."

Why? Because the Turtles knew that one missed trade could be the "monster trend" that pays for the entire year. However, markets have changed. They are noisier. Algorithmic wash trading exists. "Fakeouts" are an industry sport.

This has led modern trend followers to ask: Can we filter out the garbage signals without filtering out the winners? The answer is "Yes, but be careful." A good filter improves your "Win Rate" but might lower your "Total Profit." A bad filter just makes you feel smart while you lose money. Let's look at the filters that actually work.

Filter 1: The Volatility Contraction (The "Squeeze")

Imagine a spring. If you compress it, it stores energy. When you let go, it explodes. Markets are the same. Periods of low volatility (compression) often lead to periods of high volatility (expansion/trend).

The Problem: Breakouts that happen after the market has already made a huge move are often exhausted. Buying a breakout after a vertical 50% rally is risky. Buying a breakout after 3 months of "boring sideways chop" is where the gold is.

Filter 2: Trend Alignment (The "Regime" Filter)

This is the "Don't swim upstream" rule. If the overall market is crashing, buying a single stock breakout is like trying to run up a down escalator. You might make it, but the odds are against you.

The 200-Day Moving Average (SMA):
This is the dividing line between a Bull Market and a Bear Market for many institutions.

• The Rule: Only take Long (Buy) signals if Price > 200 SMA.
• The Short Rule: Only take Short (Sell) signals if Price < 200 SMA.

Why it works: It keeps you out of "Bear Market Rallies" (short spikes that fail quickly).
The Cost: You will be late. At the bottom of a crash, the new bull market starts below the 200 SMA. You will miss the first 20-30% of the recovery. For many traders, that is a price worth paying for safety.

Filter 3: Volume Confirmation (The "Institutional Vote")

In Forex, volume is tricky (it's decentralized). But in Stocks and Crypto, volume is the lie detector. Price can be moved by one rich dentist clicking "Market Buy." But Volume requires an army.

The Scenario:
Stock XYZ breaks the 20-day high.

• Scenario A: Volume is 50% lower than average. (This is likely a trap. No one cares.)
• Scenario B: Volume is 200% higher than average. (This is real. Institutions are piling in.)

The Dangerous Filter: "It Looks Too High"

This is not a technical filter. This is an emotional filter. And it is the worst one.

You look at a chart. It has gone from $10 to $20. Now it breaks out at $21. Your brain says: "It's too expensive. I missed it. I'll wait for a pullback."

Trend Following Truth: "High" prices usually go higher. "Low" prices usually go lower. By filtering out "expensive" charts, you are literally filtering out the strongest trends. Amazon looked "too high" at $50, $100, $500, and $2000. Never use "price level" as a filter. Use structure.

The Overfitting Trap (The Data Science Disease)

Here is how you destroy a trading system:
You run a backtest. You lose money.
You add a filter: "Only trade on Tuesdays." Now you make money.
You add another: "Only trade if RSI is exactly 62." Now you make a million dollars!

This is Curve Fitting. You are not finding a market truth; you are finding a coincidence in the past data. If you add five filters—RSI below 70, Volume > MA, Moon in Capricorn, CEO wearing a blue tie—you will create a system that looks perfect in the past and fails tomorrow.

The Robustness Test: If you change your filter parameter slightly (e.g., change 200 SMA to 190 SMA), does the result hold up? If changing 200 to 190 turns a profit into a loss, your system is brittle junk. Throw it away.

Summary: When to Filter?

• Beginners: Do NOT filter. Trade System 1 raw. Learn what false breakouts feel like. You need the scars.
• Intermediate: Add one filter. Usually the 200 SMA trend filter. It reduces stress.
• Advanced: Use Volatility Contraction. This requires more patience but increases the quality of entries significantly.

The Turtelli Dashboard shows you the raw signals. It is up to you to apply the filter. Check the "Trend" column or look at the Volume bars before you click buy.

A quick, realistic walkthrough (the kind your brain actually needs)

Let’s do a simple play-by-play, because most “strategy explanations” are missing the only part that matters: what you do on a normal Tuesday. Picture this: you scan your list once a day. One market is breaking above its recent highs. Your job is not to guess the top or get poetic. Your job is to follow the steps you already decided on a calm day. If you want the full “start here” path, the hub is Articles.

1. Check the level (the breakout point) and confirm it’s a real “new high” for your chosen window.
2. Calculate your risk using ATR. If volatility is huge, your position will be smaller. That’s not a bug.
3. Place the entry and the stop. Put the stop in the system, not in your imagination.
4. After entry, stop watching every tick. If you must stare at something, stare at your rules.
5. Exit by rule: either a reversal level hits, or your stop hits. Your mood is not on the list.

Sometimes you’ll get stopped out quickly. That’s normal. The system is built around the idea that a few big trends pay for a bunch of small “nope” trades.

Risk rules that keep you in the game

Here’s the unglamorous truth: most people don’t “lose to the market.” They lose to their own sizing. They take a normal strategy and turn it into a stress test by risking too much when they feel confident and too little when they feel scared. Turtle-style risk rules try to remove that swingy behavior.

• Pick a fixed risk per trade (a small percent of your account). Write it down.
• Use ATR for stop distance so you’re not placing stops inside normal noise.
• Size from risk: wider stop → smaller position; tighter stop → larger position.
• Cap your total exposure so one theme (or one sector) can’t dominate your portfolio.

If this feels like “too much math,” good news: it’s simple math. And it’s worth it. Start with ATR sizing.

The boredom problem (and how to stop sabotaging yourself)

A lot of traders don’t have a strategy problem — they have a boredom problem. Trend following is often quiet. That silence tricks you into “improving” the system with extra trades. That’s how people turn a good strategy into a messy hobby.

• Run scans on a schedule (daily or weekly). Outside that time, you’re done.
• Use alerts instead of constant chart-watching.
• Journal rule-breaking as a separate “expense.” It’s usually larger than commissions.
• If you need action, do something else: exercise, build tools, read. Not another trade.

A simple checklist you can follow without thinking

Quick FAQ (because your brain will ask these anyway)

• Do I need a ton of indicators? Nope. Price levels + risk rules carry the system. Extra indicators mostly add extra ways to second-guess yourself.
• Is a low win rate “bad”? Not for trend following. Many versions win less than half the time and still do fine because the winners can be much larger than the losers.
• Do I need to watch charts all day? Not if you trade daily rules. You can run a boring schedule and let the rules do the heavy lifting. The Dashboard is literally built for quick scanning.
• What should I read next? Start with Turtle Trading Explained → Donchian Channels → ATR for Turtle Trading → System 1 vs System 2. Or just scroll to the Further reading section below.

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