The Complete Turtle Trader- Summary
The Complete Turtle Trader: A True Story of Market Success
The Complete Turtle Trader by Michael Covel tells the remarkable story of how twenty-three novice investors became overnight millionaires. This journey was part of a trading experiment conducted by market wizard Richard Dennis, a trend-following pioneer. Over four years, Dennis's group of novice traders strictly adhered to his rules and collectively made $150 million.
Richard Dennis: From Humble Beginnings to Mar
ket Wizard
Richard Dennis began his career in the early 1970s as a runner on a trading floor at age 17. He soon started trading his own account, borrowing $1,600 and spending $1,200 on a seat at the Mid America Commodity Exchange. With the remaining $400, he quickly turned it into $3,000. Between 1970 and 1973, Dennis grew his equity to $100,000, and by 1974, he had made $500,000 trading soybeans. By 1975, at the age of 26, he was a millionaire.
Dennis later formed a partnership with William Eckhart, a Ph.D. mathematician who successfully applied his knowledge to the stock market. The two had a philosophical disagreement: Dennis believed his trading system could be taught to anyone with the right rules, while Eckhart disagreed. This debate led to the creation of the Turtle Trading Program, named after a trip to Singapore where Dennis was inspired by turtle farms.
The Turtle Trading Experiment
C&D Commodities, Dennis and Eckhart's firm, placed an advertisement in The Wall Street Journal, Barron's, and The International Herald, emphasizing that no prior experience was necessary. Over 1,000 people applied. The successful applicants, who included a blackjack player, a computer game designer, a pianist, and an Air Force pilot, received two weeks of training and a $1 million account to trade with.
The experiment proved Dennis's theory correct: with appropriate training, anyone could learn to trade. The group earned over $150 million, demonstrating that trading skills could be taught and were not solely inborn talents.
Training and Conceptual Framework
During the two-week training, Dennis and Eckhart emphasized the importance of understanding the theory and concepts behind their trading style. Dennis stated that traders needed a conceptual framework to guide their decisions, not just a focus on numbers. The turtles were taught to think of themselves as scientists first and traders second, with trading outcomes resulting from logical reasoning. This approach aligned with later principles of behavioral finance, as described by Nobel laureate Daniel Kahneman.
The Trading Rules
After a 10-year secrecy pact ended in 1993, the rules of the Turtle Trading System became public. Dennis highlighted that while publishing the rules was possible, few would have the discipline to consistently follow them, especially during tough times. The key to success was consistency and discipline, as demonstrated by the turtles' average annual compound rate of return of 80%.
Here are some additional rules about the experiment:
- The turtles were taught to think of themselves as scientists first and traders second.
- The success of the turtles wasn't just about the rules; Dennis said the key was having the confidence and discipline to stick to the rules, even when things were going badly.
- The turtles traded futures contracts, but the most important criteria was the liquidity of the underlying market.
- The turtles adjusted their position size based on account size. For example, if they lost money, they would base their next trade on the remaining account balance.
- The turtles entered trades as soon as the price broke the chosen timeframe (20-day or 55-day). They also added to their positions as the price moved in their favor.
- Exits were based on 10-day or 20-day lows, meaning they would exit the trade if the price fell below that level.
Components of the Turtle Trading System
Market Selection: The turtles traded commodities (futures) with a focus on liquidity to ensure easy entry and exit from positions.
Position Sizing: Position sizing was based on market volatility, represented by 'n', the 20-day moving average of the true range (ATR). Position sizes were adjusted to maintain consistent risk, with a maximum of four units per market.
Entry Strategy: Entries were based on channel breakout systems with two options: a 20-day breakout for shorter terms and a 55-day breakout for longer terms. Trades were made in either direction, with additional positions added incrementally.
Stop-Loss and Risk Management: The maximum risk per trade was 2% of total equity, adjusted for volatility. Stops were predefined but not entered with brokers to avoid revealing positions.
Exit Strategy: Exits were based on a 10-day or 20-day low, ensuring traders stayed in trends until clear evidence of a change.
Results and Legacy
In 1989, The Wall Street Journal reported the results of 14 turtle traders. The average annual return for all turtle traders was 80%, compared to the Barclays CTA Index's 25% and the S&P 500's 19.2%. The turtles kept 15% of profits, while Dennis and Eckhart retained 85%.
The Turtle Trading experiment demonstrated that with simple trend-following systems, good risk management, and strict discipline, novice traders could achieve outstanding results. This story continues to inspire traders around the world.
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