Turtle Trading - A Market Legend

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Michael Carr

19 May, 2017

in Technical Analysis

In 1983, legendary commodity traders Richard Dennis and William Eckhardt held the turtle trading experiment to prove that anyone could be taught to trade. Using his own money and trading novices, how did the experiment fare?

The Turtle Experiment
By the early 1980s, Dennis was widely recognized in the trading world as an overwhelming success. He had turned an initial stake of less than $5,000 into more than $100 million. He and his partner, Eckhardt, had frequent discussions about their success. Dennis believed anyone could be taught to trade the futures markets, while Eckhardt countered that Dennis had a special gift that allowed him to profit from trading.

The experiment was set up by Dennis to finally settle this debate. Dennis would find a group of people to teach his rules to, and then have them trade with real money. Dennis believed so strongly in his ideas that he would actually give the traders his own money to trade. The training would last for two weeks and could be repeated over and over. He called his students "turtles" after recalling turtle farms he had visited in Singapore and deciding that he could grow traders as quickly and efficiently as farm-grown turtles.

Finding the Turtles
To settle the bet, Dennis placed an ad in The Wall Street Journal and thousands applied to learn trading at the feet of widely acknowledged masters in the world of commodity trading. Only 14 traders would be make it through the first "Turtle" program. No one knows the exact criteria Dennis used, but the process included a series of true-or-false questions; a few of which you can find below:

  1. The big money in trading is made when one can get long at lows after a big downtrend.
  2. It is not helpful to watch every quote in the markets one trades.
  3. Others' opinions of the market are good to follow.
  4. If one has $100,000 to risk, one ought to risk $2,500 on every trade.
  5. On initiation one should know precisely where to liquidate if a loss occurs.

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

The Rules
Turtles were taught very specifically how to implement a trend-following strategy. The idea is that the "trend is your friend," so you should buy futures breaking out to the upside of trading ranges and sell short downside breakouts. In practice, this means, for example, buying new four-week highs as an entry signal. Figure 1 shows a typical turtle trading strategy.

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Fig1:
Buying silver using a 40-day breakout led to a highly profitable trade in November 1979.

This trade was initiated on a new 40-day high. The exit signal was a close below the 20-day low. The exact parameters used by Dennis were kept secret for many years, and are now protected by various copyrights. In "The Complete TurtleTrader: The Legend, the Lessons, the Results" (2007), author Michael Covel offers some insights into the specific rules:

  • Look at prices rather than relying on information from television or newspaper commentators to make your trading decisions.
  • Have some flexibility in setting the parameters for your buy and sell signals. Test different parameters for different markets to find out what works best from your personal perspective.
  • Plan your exit as you plan your entry. Know when you will take profits and when you will cut losses.
  • Use the average true range to calculate volatility and use this to vary your position size. Take larger positions in less volatile markets and lessen your exposure to the most volatile markets.
  • Don't ever risk more than 2% of your account on a single trade.
  • If you want to make big returns, you need to get comfortable with large drawdowns.

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Doesn't prove that trading can be taught

The experiment itself is very little proof that trading can be taught. Couple of reasons:

1. It wasn't a random group of people (needed for a general statement like "anyone can be a trader") but carefully selected.
2. They didn't trade their own money. Everyone with a little experience knows that makes a HUGE difference.
3. It is one experiment only and all others (any kind of trading rooms, schools) shows the opposite.
4. It is possible they had the right strategy for the right time, but using it later wouldn't have worked. The test of time isn't proven.

Now if you can point me to the direction where random people using their own money were taught how to trade profitably, I am subscribing to that service right away.

How come that decades of trading education and rooms and schools we almost never hear people saying: Hey, I learnt from X's trading school and I am making a killing?

May 24, 2017

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