Trend & Turtle Glossary

A guide to the language of systematic trend following and some of the terms, concepts, and phrases you’ll hear throughout Trend & Turtle.

A

Average True Range – ATR
A measure of volatility that looks at how much a market typically moves over a given period. Trend followers can use ATR to normalize risk, size positions, and place stops across markets with very different volatility.

B

Backtest
A test of a trading strategy using historical market data to see how its rules would have performed in the past. Backtests can help evaluate a system, but past performance does not guarantee future results.

Breakout
A move beyond a defined price level, such as the highest high or lowest low over a specified period. Breakouts are commonly used by trend followers as objective entry signals.

C

Closed Equity
Account equity based on completed trades, excluding unrealized gains or losses from currently open positions.

Correlation
A measure of how closely two markets tend to move together. Understanding correlation can help prevent a portfolio from unintentionally concentrating too much risk in similar markets.

D

Diversification
Spreading exposure across many different markets, sectors, asset classes, or strategies rather than relying on a small number of opportunities.

Drawdown
The decline in an account or strategy from a previous equity high to a subsequent low. Drawdowns are a normal, and sometimes significant, part of trend-following strategies.

E

Entry
The predefined condition or signal that causes a system to establish a position.

Exit
The predefined condition or signal that causes a system to close a position. For a trend follower, the exit is often designed to keep the trade alive while the trend remains intact.

F

False Breakout
A breakout that quickly reverses rather than developing into a sustained trend. Trend followers expect false breakouts and accept the resulting small losses as part of the process.

Filter
An additional rule used to determine whether a trade signal should be taken. Adding too many filters can make a system overly complicated or overfit to historical data.

G

Giveback
The portion of an open profit surrendered before a trend-following exit is triggered. Trend followers generally accept some giveback in exchange for giving large trends room to develop.

H

Holding Period
The length of time a position remains open. Long-term trend followers may hold positions for weeks, months, or occasionally longer.

I

Initial Stop
The predetermined exit level established when a trade is entered to define the initial risk of the position.

L

Let Profits Run
A fundamental trend-following principle: remain in profitable trades while the trend continues rather than attempting to predict when the trend will end.

Long
A position that benefits when the price of a market rises.

Loose Pants
Jerry Parker’s phrase for giving a profitable trade enough room to move. Rather than tightening a stop simply because a trade has become profitable, the idea is to wear “loose pants” and allow the trend room to breathe.

M

Market Diversification
Trading many different markets so the strategy does not depend on correctly identifying which market will produce the next major trend.

N

N
The volatility measurement used by the original Turtle Traders, based on Average True Range. It allowed position size and risk to be adjusted according to the volatility of each market.

O

Outlier
An unusually large market move or trade that can have an outsized impact on overall performance. Trend-following strategies are designed to remain exposed to the possibility of these rare but potentially significant trends.

Overfitting
Designing or adjusting a trading system so closely around historical data that it may perform poorly when confronted with new market conditions.

P

Position Sizing
Determining how large or small a position should be based on predefined risk rules rather than conviction or emotion.

Price
The primary input for many systematic trend followers. Rather than trying to predict economic events or interpret every headline, the strategy responds to what price is actually doing.

Process Over Prediction
The idea that consistently following a defined trading process is more important than attempting to predict what a market will do next.

R

Risk Management

The rules governing how much capital is exposed to individual trades and the portfolio as a whole.

Rules-Based Trading
Making trading decisions according to predefined rules rather than changing decisions based on opinions, predictions, headlines, or emotions.

S

Short
A position that benefits when the price of a market declines.

Signal
A predefined condition generated by a trading system indicating that an entry, exit, or other action should occur.

Stop
A predefined price level or condition used to exit a position.

Systematic Trading
An approach in which trading decisions are driven by repeatable, predefined rules.

T

The Turtles
A group of traders trained by Richard Dennis and William Eckhardt in the 1980s as part of their famous experiment exploring whether successful trading could be taught through a defined set of rules.

Trailing Stop
An exit level that moves as a favorable trend develops. It is designed to protect against a significant reversal while still allowing the trade room to continue.

Trend Following
A systematic approach that attempts to participate in sustained price movements without predicting when they will begin or how far they will go.

V

Volatility
The degree to which a market’s price moves over time. Trend-following systems often use volatility to determine position size and risk.

Volatility-Adjusted Position Sizing
Adjusting position size according to a market’s volatility so that more volatile markets generally receive smaller positions and less volatile markets can receive larger positions.

W

Whipsaw
A trade that triggers an entry and then quickly reverses, often resulting in a small loss. Multiple whipsaws can occur before a major trend develops.

Winner
A profitable trade. In trend following, a relatively small number of large winners may be responsible for a significant portion of long-term results.