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## Introduction

In our previous articles, we presented the introductory concepts to design, create, test, optimize, and evaluate a trading system. In this section, we will be using a practical example of the development process of a trading system.

## Starting to Build the Trading System

In his work, Robert Pardo exposes a seven-step methodology that must be followed to develop a trading system. These steps are as follows:

2. Write the rules in a precise form.
6. Monitor the trading performance and compare it to test performance.
7. Improve and refine the trading strategy.

A trading system starts with an investment idea that could arise from a publication in a specialized trading site or another related source. In our case under study, we are going to develop a trading strategy based on the Turtle Traders.

Our reader must consider that the process applies to any other strategy.

## The Turtle Trading System Rules

The Turtle System uses the following set of rules:

• Timeframe: Daily range.
• Entry:
• Richard Dennis defined two systems; the first one corresponds to a short-term strategy considering the 20-day breakout. In parallel, He added a long-term system using the 55-day breakout. In our system, we will be conservative and use the long-term strategy based on the 55-day breakout.
• Stop Loss: The stop loss should be placed a the distance corresponding to one time the Average True Range (ATR) of the 20 days.
• Exit: The system developed by Richard Dennis doesn’t consider a specific take-profit level as it happens with some chartist patterns. Instead, Dennis defines the exit criterion after the price moves against the position for a 10-day and a 20-day breakout. For long positions, the exit will be a 20-day low, and for short positions will correspond to 20-day high. However, to simplify our system, we will consider a profit target level at one  20-day Average True Range distance (1 20-ATR).
• Position Size: The size will correspond to 1% of the capital available in the trading account.
• Adding Positions: For educational purposes, we will not consider increasing the positioning criterion.

## Charting the Turtle Trading System

As a way to visualize what our first version of the trading system should do, we will illustrate the strategy on a chart for both long and short positions.

In the previous figure, we can observe the set of rules for the entry, stop-loss, and profit-target.  The rule of position sizing will correspond to 1% of capital in the trading account.

## Conclusions

In this first part, we identified a trading strategy and specified a set of rules corresponding to what the system should do. In the next educational article, we will start to transform the ideas into a set of instructions.

• Jaekle, U., Tomasini, E.; Trading Systems: A New Approach to System Development and Portfolio Optimisation; Harriman House Ltd.; 1st Edition (2009).
• Pardo, R.; Design, Testing, and Optimization of Trading Systems; John Wiley & Sons; 1st Edition (1992).
• Faith, C. M.; Way of the Turtle. New York: McGraw-Hill; 1st Edition (2007).