What is a 'Turtle Channel'

The Turtle Channel is an indicator similar to a Donchian Channel except that it uses differing periods for the highest high band and lowest low band. The upper band and lower band define the channel which moves along with the price bars. The name for the indicator comes from the Turtle Traders who used the channel for their trading system’s entry and exit signals.

BREAKING DOWN 'Turtle Channel'

For trading an uptrend, the Turtle Channel uses an upper band of a longer time period than the lower band. In the chart below, the upper band uses a 40 day period while the lower band uses 20 days. A Turtle style trading system would enter a long position once price touches the upper band after having come through the channel off of the lower band. In this case, a long position in USO would have been initiated in mid-July and the position would still be open seven months later because price never went back down through the channel to touch the lower band – the exit rule for the system.

A Turtle Channel for a downtrend uses a shorter period for the upper band and a longer period for the lower band. In the case below, the upper band uses 20 days and the lower band uses 40 days. A trader using this methodology would have shorted VXX in mid-September and covered the position in late January.

A trading system based on a Turtle Channel is a trend following system which performs generally well for trending markets but performs poorly in a sideways market type.

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