Turtle Trading Drawdowns: What to Expect and How to Survive Them

If someone sold you a trading system that "never loses," check your wallet. Trend following works because it has drawdowns. If it were easy, if the line just went straight up like a Ponzi scheme, the edge would be arbitraged away by high-frequency bots in 4 milliseconds. The drawdown is the "pain premium" you pay for the big returns.

But knowing that intellectually and feeling it viscerally are two different things. A 20% drawdown feels like a "correction." A 40% drawdown feels like "My strategy is broken." A 50% drawdown feels like "I am a failure as a human being." Here is how to survive the valley of death.

Why Drawdowns Happen (The Mechanics)

Turtle trading buys breakouts. Most breakouts fail (false breakouts). You take small losses on the fakes, waiting for the real trend. A "drawdown" is simply a cluster of false breakouts happening back-to-back, or a period where markets are choppy and mean-reverting.

Imagine you are a casino. You have a mathematical edge (Green 00 in Roulette). But sometimes, Red hits 10 times in a row. Does the casino panic? No. They know the math. But you are a casino with emotions. And when you lose 10 times in a row, you want to fire the dealer (your system).

The Math of Pain: What is "Normal"?

Let's look at the cold, hard probabilities. If you have a Trend Following system with a 40% Win Rate (which is typical for Turtles):

Read that last one again. You will spend most of your life below your "High Water Mark" (Account Peak). If you need to hit a new equity high every day to feel happy, do not be a trend follower. Go work for a salary.

Historical Context: The Turtles Bleed Too

The original Turtles in the 1980s had massive returns (some made 100%+ per year). But they also had massive drawdowns. It was common for them to be down 20%, 30%, or even more. Richard Dennis himself blew up accounts. The difference between the survivors and the quitters was Risk Management.

Survival Tactic 1: The "Cut Size" Rule

This is the most important rule in the Turtle arsenal for survival. If your account drops 10%, you cut your risk unit (N-unit) by 20%.

Example:
- Account: $100,000. Risk per trade: 1% ($1,000).
- Account drops to $90,000 (10% drawdown).
- Panic Reaction: "I need to double my size to make it back!" (This is Martingale. You will die.)
- Turtle Reaction: "I will now risk 0.8% instead of 1%."
- Account drops to $80,000. Now risk 0.6%.

This makes your equity curve "convex." You lose slower as you get poorer. It keeps you alive so you are still at the table when the winning streak finally comes.

Survival Tactic 2: Aggressive Diversification

If you only trade Tech Stocks, and Tech Stocks go sideways for 2 years, you are in a 2-year drawdown. The only way to smooth the curve is to trade uncorrelated assets.

• Stocks are chopping? Maybe Gold is trending.
• Gold is dead? Maybe the Euro is crashing.
• Forex is flat? Maybe Crypto is mooning.

Read Turtle Trading in Futures to understand why multi-asset trading is the holy grail of drawdown reduction.

Survival Tactic 3: Stop Watching the Scoreboard

During a drawdown, checking your P&L daily is psychological torture. It's like weighing yourself every hour when you're trying to lose weight. Shift your focus from Outcome (Money) to Process (Execution).

Every day, ask: "Did I follow my rules?"
- If you lost money but followed rules: Good Day.
- If you made money but broke rules: Bad Day.

Rewire your brain to get dopamine from discipline, not dollars.

The "System Hop" Trap

Here is the cycle of doom:
1. Start Strategy A (Trend Following).
2. Drawdown happens (Strategy A is "out of favor").
3. Switch to Strategy B (Mean Reversion) because it's working now.
4. Strategy A recovers (you missed it). Strategy B goes into drawdown.
5. Switch back to Strategy A.

This guarantees you capture all the losses and none of the wins. Pick a strategy that fits your personality and stick to it for at least 6-12 months.

When to Actually Quit (Risk of Ruin)

Is there a point where you should stop? Yes. If you hit your "Uncle Point" (e.g., 50% drawdown), stop trading. Take a month off. Re-evaluate your position sizing. Usually, blowing up happens because you sized too big, not because the strategy failed.

(See Article 004: Position Sizing).

The night is darkest just before the dawn. Most traders quit right at the bottom of the drawdown, mere days before the trend that would have made their career. Stay small. Stay disciplined. Stay in the game.

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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