History
In the early 1980s, successful traders Richard Dennis and William Eckhardt made a bet. Dennis thought anyone could learn to trade profitably. Eckhardt believed people had to be born with trading talent. To settle their dispute, Dennis took out ads in The Wall Street Journal seeking trainees. More than 1,000 hopefuls applied, and Dennis chose the 13 smartest, most promising applicants. Curtis M. Faith, then only 19, was an initial trainee. Dennis called his class the “Turtles” after he visited a turtle farm in Singapore and decided that, just as the farmers were raising turtles, he could cultivate successful traders. Faith and his classmates weren’t typical guys off the street. They were all highly intelligent, and adept at math and analysis. The group included a Ph.D., former professional gamblers and several professional traders. Dennis won the bet. Clearly, he could train traders.
One initial lesson: Traders are essentially “risk junkies.” Investors, such as Warren Buffett, buy things they think will appreciate in value, then hold them for the long term. Traders, in contrast, don’t buy tangible items such as companies or commodities. Instead, they buy stocks, futures contracts and options. They don’t consider the character of the company’s CEO. Instead, traders traffic in risk.
The second lesson: Emotion can be either your worst enemy (if you act emotionally) or your best friend (if others are buying or selling based on their emotions). People don’t make rational financial decisions. Economists long have argued that individuals act logically, but successful traders know that people often fall prey to emotions. Traders balance four major emotions – “hope, fear, greed and despair” – that can cause them to behave foolishly and become victims of “cognitive biases.”
Some of the pitfalls that can affect traders are:
“Loss aversion” – The urge to avoid losing money trumps all other actions.
“Sunk costs effect” – Spent money is more vital than money you’ll spend in the future.
“Disposition effect” – The habit of cashing out winners and riding out losers.
“Outcome bias” – Judging a decision on its result, not on the rigor of the process that led to the decision.
“Recency bias”– Treating recent experience as more important than older experience.
“Anchoring” – Relying too much on easily available information.
“Bandwagon effect” – Adjusting your beliefs based on other people’s beliefs.
“Belief in the law of small numbers” – Reaching conclusions with too little data.
Traders typically follow one of a handful of strategies:
“Trend following” – Traders who follow trends try to cash in on sustained price movements. They rush in when a market reaches a new high or low and shows a definite direction over a period of months, and they exit when it reverses for a few weeks. This can be a profitable strategy, although identifying trends requires constant vigilance. This system has some risks. Because true trends are rare, trend-based traders lose more than they win. And, trend traders are sure to lose money once the trend ends.
“Countertrend trading” – This is the opposite of the trend strategy. Instead of buying at a new high, the countertrend trader bets that the new high isn’t a trend and sells short.
“Swing trading” – This style is similar to trend trading but with shorter time horizons. The trend trader follows the trend for several months. The swing trader seeks shorter-term price fluctuations that might last only a few weeks.
“Day trading” – Hold a position for a few hours; exit by the close of business.
During their two-week training session, the Turtles learned four basic principles:
“Trade with an edge” – The edge is any system that can make money in the long run because it produces more winners than losers. The Turtles used the breakout method of trading, sometimes known as Donchian channels. They would watch a given market over periods of 20 and 60 days, and buy when the price exceeded the high during that time. Usually, there’d be no breakout and, therefore, no trades to execute.
“Manage risk” – An edge is fine, but if you don’t control your potential downside, your nest egg won’t last long enough to prove your trading system. The Turtles managed risk with a stop-loss exit that would get them out of the trade if the stock fell a certain amount.
“Be consistent” – Consistency is crucial. Once you have a system, you must follow its rules. Because two or three trades can make or break your year, be sure to stick with your system. Faith learned how difficult this was. During the practice trading sessions, the Turtles used this system to buy heating oil contracts. These trades were profitable, but a brief pullback spooked many of the students. Most took their profits on the dip. Faith alone hung on and got another run-up. He was baffled that the others broke the rules.
“Keep it simple” – People often think that profitable traders follow a complicated, arcane strategy. The best systems are simple ones; executing is the hard part.
Turtles learned that trying to predict the future is a fool’s game. They just want to make money, right or wrong. However, not caring whether you’re right is difficult. Here’s a useful trick: Expect every trade to lose money. Then, when that happens, you don’t see it as a reflection of your intelligence. The important thing isn’t that every trade is a winner, but that every trade is made within the confines of your plan. The Turtles learned that most trades would lose. The Turtle strategy works if you contain your losers so that they are small, and let your few big winners each year create your profits. The Turtles also learned to:
“Trade in the present” – Forget the past and don’t try to forecast the future.
“Think in terms of probabilities, not prediction” – No one can accurately predict the price of a commodity, but anyone can use methods that increase the odds of being right.
“Take responsibility for your own trades” – Don’t blame losing trades on the markets or your broker. They’re your fault. Accept your missteps and learn from them.
The all-inclusive Turtle trading system covered every choice traders make: what and when to purchase or sell, what volume to acquire or dispose of (“position sizing”), when to exit whether you are winning or losing, and what tactics to use. This “tested mechanical” system left nothing to “the subjective whims of the trader.” The trick was to adhere to it. New traders often base their positions on hunches or happenstance. This is a sure way to lose money. Successful traders have an edge, a statistical advantage based on repeating market patterns and systems. An edge tells you before you trade that you have a good chance to make money. Edges typically come from algorithms that suggest which markets to trade, when to enter and when to leave.
Turtle trading is basically a trend following strategy for the futures market.
Here are the rules of the original turtle trading strategy:
Entry: Buy when the price breaks above the 20-day high
Stop loss: 2 ATR from the entry price
Trailing stop loss: 10-day low
Risk management: 2% of your account
Vice versa for short trades
Does this strategy still work?
Results of the turtle trading rules from 2000 - 2019 over several markets:
Number of trades: 4322
Winning rate: 36.83%
Annual return: -0.38%
Maximum drawdown: -95.38%
So are the Turtle rules dead? Let’s examine the principles of trend following:
Buy high and sell higher (sell low and cover lower)
Risk a fraction of your capital on each trade
Trade a variety of markets from different sectors (as many as possible)
Trail your stop loss to ride the trend
Don’t predict, react
If you take the Turtle Trading rules and compare it to the principles of trend following, you’ll notice there are a few things that can be improved on. For example, you can increase the number of markets to trade, reduce your risk per trade, and increase the length of the breakout (to reduce whipsaw). So, let’s modify our earlier turtle trading rules and see if we can make things better…
Modified turtle trading rules and results for 2000 -2019 covering more markets:
Entry: Buy when the price breaks above the 200-day high (previously was 20-day breakout)
Stop loss: 2 ATR from the entry price
Trailing stop loss: 10-day low
Risk management: 1% of your account (previously was 2%)
Vice versa for short trades
Results of modified turtle trading rules
Number of trades: 2957
Winning rate: 40.95%
Annual return: 32.12%
Maximum drawdown: -41.51%
Here's what a modified Turtle trade looks like:
Useful Stuff
Download original Turtle Trading Rules HERE
Download original Turtle Trading MT4 indicator HERE
Download modified Turtle Rules MT4 indicator HERE
Download Curtis Faith "The Way of the Turtle" HERE
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