Sometime in the year 1983 Richard Dennis, a well-known commodities speculator was having a dispute with his friend William Eckhardt on the topic that either traders are born or made. Dennis thought that people could be trained to trade while Eckhardt believed that people could not be trained rather the basic aptitude and intrinsic capabilities of a person make him a good trader.
To verify this Dennis decided to recruit few traders and train them and after training gave them actual accounts to trade. His students which he called Turtles became the most famous traders in the trading history. Over a period of four years, they had earned an average compound rate of 80%. Richard Dennis was right in his thinking. He proved that teaching people with a definite set of rules, successful traders could be made.
The Turtle Trading system is a complete trading system. It provides decisions at every point and no decision is left to the gut feeling of the trader. This was the main reason for its success because all the decisions were machine based and not based on the judgment of the trader.
Turtles were future traders more commonly known as commodity traders. They traded future contracts on popular U.S commodity exchanges. They were trading millions of dollars, they could not trade in a market that traded few hundred contracts per day because the orders generated by turtles would move the market so tremendously that it would be impossible to enter or exit the market without taking huge losses.
The Turtles traded in most liquid markets.
Following is the list of markets in which turtles traded:
Chicago Board of Trade
New York Coffee, Cocoa and Sugar exchange
Chicago Mercantile Exchange
New York Mercantile Exchange
The Turtles were given the discretion not to trade any of commodities on the list if they don’t want. However if a trader chose not to trade in a particular market then he was not to trade in that market at all. They were not supposed to trade inconsistently in markets.
Turtles used a position sizing algorithm, it normalized the dollar volatility of a position by adjusting position size. Irrespective of the volatility of market under consideration a given position would move profit and loss about the same amount of dollars in a day. The normalization of volatility is of significant importance different trades placed in different markets tend to have the same chance of a particular dollar profit or loss. This increases the benefit of diversification across different markets. If the volatility of a market is lower significant trend would result in a bigger gain because Turtles have many contracts in different markets of that lower volatility commodity.
Turtles used a concept called N to represent volatility of a particular market. N represents an average range of price movement that a market makes in a single day. N was measured in the same points as the contract. To compute daily True Range:
True Range=Maximum (H-L, H-PDC, PDC-L)
PDC=previous day close
The Turtles then took a twenty-day moving average of true ranges to calculate N.
(This formula requires previous day’s N value; you must start with a 20 day simple average of the true range for initial calculation.)
Dollar volatility represented by underlying markets price volatility (N), position size can be determined by the formula
Dollar volatility=N x Dollars per point
Turtle built positions in pieces which we normally call as units. 1N of a unit represented 1% of the account equity. Thus, a unit can be calculated as
Unit=1% of the account/Market dollar volatility
Unit= 1% of the account/N x Dollars per point
Turtles used market Volatility to measure risk. This risk measurement was used to build positions in increments that represented a constant amount of volatility. This increase the likelihood of winning trades
Richard taught his Turtles an entry system based on Chicago Breakout system. Rules were given for two different but related breakout systems called as System1 and System 2.Turtles were given the discretion to choose their equity designated to each system.
Breakout is defined as the price exceeding highest point or lowest point of a particular number of days. A 20 days breakout will be defined as the price exceeding high or low of preceding 20 days
In this system, Turtles entered positions when price exceeded a single point the highest or lowest in the preceding 20 days. When price exceeded 20 days highest point a long position was initiated by buying one unit of the commodity when the price ticked one unit below the lowest point a short position was initiated by selling one unit of the commodity.
The entry signals in System 1 can be disregarded if it was a winning trade in the last breakout. To verify this particular commodity the last breakout regardless whether the breakout was skipped or taken because of this rule. The trend of the last breakout was immaterial to this rule. Thus, a losing long breakout or losing short breakout would enable the subsequent new breakout to be taken as valid entry
At some point, there would a price which would prompt short entry and another higher price prompting long entry. Entry would be closer to current price (i.e. 20 days breakout) if the last breakout was loss and if it had been a winner entry would be farther away(i.e. 55 days breakout)
In this system, Turtles entered positions when price exceeded a single point the highest point or lowest point in the preceding 55 days. When price exceeded 55 days highest a long position was initiated by buying one unit of the commodity when the price ticked one unit below the lowest a short position was initiated by selling one unit of the commodity. In system 2 breakouts are taken regardless of the fact that the previous breakout was a winner or not.
The Turtles always used Stops to minimize losses. For most people it easy to cling to the hope that their losing trade will turnaround then to get out of a trade admitting the fact that they did trade did not work at all. Traders who do not cut their losses will not be successful in the long term. The most important thing about stop is to pre-define a point where you will get out of the trade before you take the position in a trade.
Since the Turtles dealt with large positions they did not want to reveal their position by telling stop orders to the brokers; Instead they kept a particular price in mind which when hit would encourage them to exit by taking a market order or limit order.
Based on their position risk the turtles placed their stops. Risk incurred in a single trade is determined as below 2%. 1 N price movement represented 1% of account equity, the maximum stop would allow only 2 % risk of 2 N price movement .For Turtles, they took 2 N below the entry for long positions, 2N above the entry for short positions.
The method to keep total position risk at a minimum, additional units have added the stops for earlier units raised by 1/2 N. This meant a stop for entire positions would be placed at 2 N from most recently added unit.
Getting out of a winning position too early taking lesser profit is one of the most common mistakes that trader do when trading . In Turtle system, if you exist a winning position at 1 N profit while long positions are exited at 2N loss then you will need twice many winning trades to offset the loss from losing trades. Two systems were devised for Turtles
System 1 Exit: Exit at a point when it was a 10 day lowest point for a long position and 10 days highest for a short position .All the units will be excited when price went against the position for a 10-day breakout
System 2 Exit: Exit at a point when it was a 20 day lowest point for a long position and 20 days highest point for a long position. All the units will be excited when price went against the position for a 20-day breakout
The turtles watched the price the whole day and started to phone in exit orders when the price traded through the exit breakout price.
Some of the tactics for gaining better profits and minimizing losses are as follows
Turtles were advised not to use stops when placing orders instead a watch on the market should be kept and enter when price hit the stop price
To place limit orders instead of market orders because limit order offers chance for better fills and less slippage
At times markets move very quickly, thousands of dollars per contract in just a few minutes in such condition Turtles were advised not to panic rather wait till market stabilizes and then place orders. In case of rising fast market sellers stop selling and wait for a higher price, and they will not re-commence selling until price stops moving up