The Turtle Trading system is a legendary trading methodology that has captivated the imagination of traders and investors for decades. This systematic approach to trading was born out of a fascinating experiment conducted by renowned commodities trader Richard Dennis and his longtime friend William Eckhardt in the early 1980s. The experiment, which sought to answer the age-old question of whether great traders are born or made, led to the creation of one of the most famous trading systems in financial history.
The story of the Turtle Traders begins with a debate between Dennis and Eckhardt. Dennis believed that successful trading could be taught, while Eckhardt argued that it was an innate skill. To settle their disagreement, they decided to conduct an experiment. Dennis would recruit and train a group of novices in his trading methods, and then give them accounts to trade with real money. These trainees became known as the "Turtles," a name inspired by Dennis's visit to Singapore, where he had seen turtle farms and remarked that he was going to "grow traders just like they grow turtles in Singapore."
In 1983, Dennis placed ads in major newspapers, seeking applicants for his trading program. From thousands of applicants, he selected a diverse group of individuals with varying backgrounds, including a security guard, an actor, and a blackjack player. The chosen few were then subjected to an intensive two-week training program where they were taught Dennis's trading system.
The Turtle Trading system is essentially a trend-following strategy, designed to capture large price movements in various futures markets. It is based on the premise that markets exhibit trends, and these trends can be identified and profitably traded. The system uses a set of clearly defined rules for entering and exiting trades, position sizing, and risk management.
One of the key components of the Turtle Trading system is its entry rules. The Turtles were taught two main entry techniques: System 1 and System 2. System 1 involved entering a trade when the price broke out to a 20-day high or low. System 2 used a longer-term 55-day breakout. These breakouts were seen as indicators of potential new trends forming in the market.
Exit rules were equally important in the Turtle system. The Turtles were taught to exit their positions when the price moved against them by a certain amount, known as the N/2 exit (where N represents the average true range of the market). This helped to limit losses on losing trades. For winning trades, they were instructed to hold their positions until the market reversed by a certain amount, typically using a 10-day low for long positions or a 10-day high for short positions.
Position sizing was a critical aspect of the Turtle Trading system. The Turtles were taught to use a concept called "volatility-adjusted position sizing." This meant that they would risk a fixed percentage of their account on each trade, typically around 2%. The actual number of contracts traded would vary based on the volatility of the market, as measured by the average true range (ATR). This approach ensured that they maintained consistent risk across different markets and market conditions.
Risk management was emphasized heavily in the Turtle program. In addition to the position sizing rules, the Turtles were taught to limit their overall market exposure. They were not allowed to risk more than 4% of their account on any single market, or more than 10% on any single direction (long or short). These rules helped to prevent catastrophic losses and ensure the longevity of their trading careers.
The Turtle Trading system was designed to be applied across a wide range of futures markets, including commodities, currencies, and financial instruments. This diversification helped to spread risk and increase the opportunities for capturing significant trends.
One of the most remarkable aspects of the Turtle experiment was its success. Many of the Turtles went on to become highly successful traders, with some reportedly earning millions of dollars. This outcome seemed to validate Dennis's belief that trading could indeed be taught, and it catapulted the Turtle Trading system into the spotlight of the financial world.
However, it's important to note that the success of the Turtle Traders wasn't solely due to the mechanical application of trading rules. The psychological aspects of trading were also a crucial part of their training. The Turtles were taught to maintain discipline, stick to their system even during losing streaks, and manage their emotions in the face of significant profits or losses. This mental training was perhaps as important as the technical aspects of the system in contributing to their success.
The Turtle Trading experiment ended in 1988, but its impact on the trading world has been long-lasting. The system has been widely studied, discussed, and even replicated by traders around the world. Books have been written about the Turtle Traders, including "The Complete Turtle Trader" by Michael Covel and "Way of the Turtle" by Curtis Faith, one of the original Turtles.
One of the key lessons from the Turtle Trading experiment is the importance of having a systematic approach to trading. By following a set of clearly defined rules, the Turtles were able to remove much of the emotion and guesswork from their trading decisions. This systematic approach can help traders maintain discipline and consistency, which are crucial for long-term success in the markets.
Another important aspect of the Turtle system is its emphasis on risk management. By carefully controlling position sizes and overall market exposure, the system helps to ensure that no single trade or market can cause catastrophic losses. This focus on preserving capital is a key principle that many successful traders and investors still adhere to today.
The Turtle Trading system also highlights the potential of trend-following strategies. While not all market trends will be profitable, the system is designed to capture significant price movements when they do occur. This can lead to substantial profits that more than compensate for the smaller losses incurred when trends fail to materialize.
However, it's worth noting that the financial markets have evolved significantly since the 1980s when the Turtle Trading system was developed. Increased competition, the rise of algorithmic trading, and changes in market structure have made it more challenging to implement trend-following strategies successfully. Many traders have had to adapt and refine the original Turtle system to remain competitive in today's markets.
Despite these challenges, many of the core principles of the Turtle Trading system remain relevant today. The importance of systematic trading, robust risk management, and emotional discipline are timeless lessons that can benefit traders across different markets and timeframes.
The legacy of the Turtle Traders extends beyond just their trading system. The experiment demonstrated that with proper training and discipline, individuals from diverse backgrounds could become successful traders. This democratization of trading knowledge has inspired countless individuals to pursue careers in trading and investment.
In recent years, there has been renewed interest in systematic trading approaches like the Turtle system. The rise of quantitative trading and the increasing accessibility of trading algorithms have led many traders to explore rule-based strategies. While modern approaches often incorporate more sophisticated statistical techniques and machine learning algorithms, many still draw inspiration from the fundamental principles of the Turtle Trading system.
The Turtle Trading experiment also highlighted the importance of psychological factors in trading success. Even with a robust trading system, the Turtles had to learn to manage their emotions and maintain discipline in the face of both winning and losing streaks. This aspect of trading psychology has become an increasingly important area of study and training for modern traders.
In conclusion, the Turtle Trading system represents a significant chapter in the history of financial markets. It demonstrated that successful trading could be taught, provided a systematic approach to capturing market trends, and emphasized the critical importance of risk management. While the specific rules of the system may need adaptation for today's markets, the core principles continue to influence traders and investors worldwide. The legacy of the Turtle Traders serves as a testament to the power of systematic trading and proper training in achieving success in the challenging world of financial markets.
