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.
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:
- The big money in trading is made when one can get long at lows after a big downtrend.
- It is not helpful to watch every quote in the markets one trades.
- Others’ opinions of the market are good to follow.
- If one has $10,000 to risk, one ought to risk $2,500 on every trade.
- On initiation one should know precisely where to liquidate if a loss occurs.
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.
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. (To learn more, read The Importance Of A Profit/Loss Plan.)
- 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. (For more insight, see Measure Volatility With Average True Range.)
- 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.