Turtle Trading: A Market Legend

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Turtle Trading: A Market Legend

Legendary commodities traders Richard Dennis and William Eckhardt conducted the turtle experiment in 1983 to demonstrate that anybody could be taught to trade. How did the trial go with his own money and rookie traders?

Key Takeaways

  • The Turtle Trading venture was deemed a huge success.
  • Market circumstances are always changing, and some wonder if this trading technique can endure in today’s markets.
  • Turtle trading is centered on buying a stock or contract at a breakthrough and selling swiftly after a retracement or price decline.
  • One of the most well-known trend-following tactics is the Turtle Trading strategy.

The Turtle Experiment

Dennis was well acknowledged in the trading world as a huge success by the early 1980s. He had converted a $5,000 initial investment into more than $100 million. He and his companion, Eckhardt, discussed their achievement often. Dennis thought that everyone could be taught to trade futures markets, whilst Eckhardt claimed that Dennis had a specific talent that enabled him to earn from trading.

Dennis put up the experiment to finally resolve this argument. Dennis would recruit a group of individuals to explain his rules to before having them trade with actual money. Dennis was so confident in his ideas that he would offer the traders his own money to trade with. The training would last two weeks and may be done several times. He nicknamed his pupils “turtles” after visiting turtle farms in Singapore and thinking that he could produce merchants as rapidly and effectively as farm-grown turtles.

Finding the Turtles

To settle the wager, Dennis posted an ad in The Wall Street Journal, and hundreds applied to study commodities trading from internationally recognized gurus. Only 14 traders would complete the inaugural “Turtle” program. Nobody knows what criteria Dennis employed, but the procedure involved a number of true-or-false questions, some of which are included below:

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  1. The real money in trading is made when one can go long at the bottom of a large downturn.
  2. It is not necessary to monitor every quotation in the marketplaces in which one trades.
  3. Following the market thoughts of others is a smart idea.
  4. If you have $10,000 to invest, you should risk $2,500 on each transaction.
  5. When starting off, one should know exactly where to liquidate if a loss arises.

For the record, 1 and 3 are false according to the Turtle technique; 2, 4, and 5 are true.

The Rules

Turtles were taught exactly how to use a trend-following method. The premise is that the “trend is your friend,” therefore you should purchase futures that break out to the upside of trading ranges and sell futures that break out to the downside. In reality, this implies purchasing fresh four-week highs as an entry signal, for example. Figure 1 depicts a common turtle trading approach.

Figure 1: In November 1979, buying silver utilizing a 40-day breakout resulted in an extremely lucrative move.

Source: Genesis Trade Navigator

This transaction began on a fresh 40-day high. The departure signal was at the 20-day low. Dennis’ specific settings were kept secret for many years and are now protected by numerous copyrights. Author Michael Covel provides some insight into the precise guidelines in “The Complete TurtleTrader: The Legend, the Lessons, and the Results” (2007):

  • To make trading judgments, look at pricing rather than depending on information from television or newspaper pundits.
  • Set the settings for your buy and sell signals with considerable leeway. Experiment with various settings for different markets to see what works best for you.
  • Prepare your departure as carefully as you plan your arrival. Know when to reap gains and when to reduce losses.
  • Calculate volatility using the average true range and use it to adjust your position size. Increase your exposure to less volatile markets while decreasing your exposure to the most volatile markets.
  • Never put more than 2% of your account at risk in a single transaction.
  • If you want to achieve huge returns, you must get used to massive drawdowns.
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Did It Work?

According to former turtle Russell Sands, the two classes of turtles Dennis personally coached earned more than $175 million over the course of five years. Dennis had shown without a shadow of a doubt that novices can learn to trade profitably. Sands maintains that the system is still functional, claiming that if you began with $10,000 in early 2007 and followed the original turtle rules, you would have completed the year with $25,000.

Individuals may use the fundamental concepts of turtle trading to their own trade even without Dennis’ assistance. The main objective is to purchase breakouts and exit when prices begin to consolidate or reverse. Because a market experiences both uptrends and downtrends, short bets must be conducted using the same concepts as long transactions. While any time frame may be utilized for the entrance signal, in order to optimize successful trades, the exit signal must be much shorter.

Despite its enormous success, the negative of turtle trading is at least as significant as the positive. Drawdowns are to be anticipated with every trading technique, but they are more severe with trend-following strategies. This is attributable, at least in part, to the fact that the majority of breakouts are false movements, resulting in a huge percentage of lost transactions. Finally, practitioners advise expecting to be accurate 40%-50% of the time and being prepared for significant drawdowns.

The Bottom Line

One of the classic stock market tales is the story of how a bunch of non-traders learned to trade for enormous gains. It’s also an excellent example of how adhering to a set of established criteria may help traders achieve higher profits. In this situation, though, the outcomes are similar to tossing a coin, so you must consider if this technique is right for you.

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