Breaking it Down: Turtle Traders
'Breaking It Down,' where we embark on a journey into the world of futures, commodities, bonds, equities and more! In this edition, we shift our spotlight to the Turtle Traders.
Richard Dennis, an iconic trader celebrated for his trend-following strategies and the noteworthy Turtles experiment. We will delve into an exploration of Dennis's trading approach, offering insights into its foundational principles.
Key to Dennis's methodology is the Turtle Trading System, a trend-following framework that underscores the significance of position sizing, precise entry and exit protocols, and robust risk management. Anchored in specific rules and principles, the system aims to identify and trail enduring market trends.
He discovered the Turtles in a bid to settle the wager, Dennis and William Eckhardt initiated the search for aspiring traders by placing an advertisement in The Wall Street Journal. The response was overwhelming, with thousands expressing interest in learning the intricacies of commodity trading from acknowledged masters. However, only 14 individuals successfully navigated the selection process for the inaugural "Turtle" program. The precise criteria used by Dennis remain unknown, but the evaluation involved a series of true-or-false questions, a few of which are presented below:
The key to substantial profits in trading lies in entering long positions at lows following a significant downtrend.
Constantly monitoring every quote in the markets one engages in is not a beneficial practice.
Relying on others' market opinions is a sound strategy to pursue.
If one has $10,000 at risk, it is advisable to expose $2,500 on each trade.
A precise plan for liquidation in the event of a loss should be established at the initiation of a trade.
The Turtle Trading System excels at recognizing and navigating enduring market trends. It leverages a fusion of technical indicators to discern trends and strategically pinpoint entry and exit points. Under Dennis's guidance, the Turtles harnessed a spectrum of indicators to adeptly identify trends and make judicious decisions on the timing of trade entries and exits.
The Guidelines Turtles underwent precise instruction on executing a trend-following approach. The core principle was anchored in the belief that the "trend is your friend," advocating the purchase of futures exhibiting upward breakouts from trading ranges and the initiation of short positions during downward breakouts. In practical terms, this translated to, for instance, adopting new 50 day highs as an entry signal.
In Michael Covel's "The Complete TurtleTrader: The Legend, the Lessons, the Results" (2007), some insights into the specific rules are provided:
Base trading decisions on price analysis rather than relying on information from television or newspaper commentators.
Introduce flexibility in defining parameters for buy and sell signals; experiment with different settings for diverse markets to identify the most effective approach.
Strategically plan your exit concurrent with your entry, determining when to take profits and cut losses.
Leverage the average true range to gauge volatility, adjusting position size accordingly. Opt for larger positions in less volatile markets and reduce exposure in highly volatile ones.
Adhere to a risk management principle of not exceeding 2% of your account on a single trade.
Acknowledge that significant returns often coincide with substantial drawdowns, requiring a comfort level with these fluctuations.
In the realm of stock market legends, the narrative of a group of non-traders mastering the art for significant profits stands out as truly extraordinary. The journey serves as a compelling lesson, underscoring the power of adhering to a well-defined set of proven criteria. As we navigate the ever-evolving landscape of financial markets, the wisdom derived from the Turtle Trading experiment reminds us that strategic discipline, combined with a commitment to established principles, can pave the way for traders to achieve greater returns.
For more on Trend Following watch our new interview with Tom BassoAnd the original Turtle Trader Jerry Parker
