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There are many interesting stories in the world of investing. Today we will tell you what is Turtle Trading. Is trading for everybody? Can anyone learn how to do it? Richard Dennis and William Eckhardt made an experiment known as the Turtle. Let's see what was it about and what was the result.
Key Takeaways🔑
| →Turtle Trading was an experiment conducted by Richard Dennis and William Eckhardt in the 1980s to test if trading skills can be taught. |
| →The Turtle Trading strategy is based on trend-following, with entry and exit points determined by breakouts and volatility. |
| →Original Turtles achieved impressive results, but the strategy requires adjustments to be effective in modern markets. |
What is Turtle Trading?
The experimenters
Richard Dennis gained popularity in the early 1980s. He turned $5,000 into over $100 million. His success was truly impressive and he used to discuss it with his partner, William Eckhardt. Dennis was sure that anyone can repeat his success. Eckhardt, on the other hand, was convinced Dennis possessed a special talent.
Dennis has decided to perform an experiment. During his visit to Singapore, he had seen turtle farms. A comparison came to his head that he can grow traders as fast and efficiently as turtles on those farms.
The Turtles
Dennis has published an advertisement in The Wall Street Journal that he was looking for people to attend his training course. It was designed to last two weeks but could be repeated, and after this time the trainees (called by Dennis the Turtles) had to begin trading with real money. He was even giving his own money, so confident was he of success.
By this time, Dennis and Eckhardt were recognised masters in the trading world so thousands wanted to participate. But there was a place just for 14 people. The selection process was invented by Dennis and included, among others, a series of statements with True/False answers.
- A trader has a chance to make big money when he opens a long position at a low after a long downtrend.
- At the time of initiation, one should know exactly where to liquidate in the event of a loss.
- Having $10,000 to risk, one should risk $2,500 on each transaction.
- It is good to follow the opinion of others.
- Watching every quote in the market one trades is not helpful.
The above are examples of the questions from Dennis's survey. How would you answer? According to Dennis, the first and the fourth are false, and the rest are true.
What is turtle trading strategy?
The first rule is that “the trend is your friend”. Go long when the breakout from the range occurs to the upside.
Specific parameters of Dennis's method were maintained in secret. We get, however, some insights into them in Michael Covel's book The Complete Turtle Trader: The Legend, the Lessons, the Results. Find a few examples below.
Your decision should be rather made based on true prices and not on the information you receive from commentators in the newspaper or on television.
A trader should be flexible. Do not be afraid to try distinct parameters for various markets in different circumstances. Only then you will be able to discover the best set for yourself.
Not only entry points should be carefully planned. The exit moment does matter. You should decide ahead where you will cut losses and where to take profit.
Calculate volatility with the average true range. This will allow you to vary the size of the position. Your exposure may be larger in the markets with lower volatility, and smaller in more volatile markets.
One should never risk more than 2% of the overall capital on a single trade.
Big returns cannot be reached if you are not comfortable with extensive drawdowns.
The results
The results of the experiment were quite promising. Russel Sands, a former turtle, states that the Turtle method functions well. People who were personally trained by Dennis have made over $175 million in just 5 years.
There is, however, a downside to this method. Breakouts often offer false signals and so the trades lose. You should be always prepared for the worst scenario.
Is turtle trading profitable?
This question is asked by every person who learns the history and finds out what is Turtle Trading.
The original turtle strategy involved trading in bond markets, currency contracts, fossil fuels, precious metals and agricultural product contracts.
As I mentioned, the exact rules of the strategy are not completely known, but the signal to take a position was to break through the 20-day maximum or price minimum. The initial stop loss was based on the double ATR measured from the entry price. If the trade was going the right way, the stop loss was pulled behind the 10-day high or low depending on the direction of the open position.
If we only test the method with the above assumptions, we find that the strategy has been losing over the past 20 years. However, it is important to remember that we do not know the full assumptions and that the market is changing. Some modifications made to this model can make this method really effective. This is a method for medium and long-term investors. It is based on following a trend, and as such, it has a chance to continue to work because trends exist all the time in financial markets.
Pros and Cons of Turtle Trading📊
Pros✅
- Based on a systematic approach, reducing emotional impact on decisions
- Focuses on following trends, a concept that continues to exist in financial markets
- Adjustable parameters, allowing traders to adapt the strategy to different markets
Cons❌
- Can generate false breakout signals, leading to losses
- Exact parameters of the original strategy remain unknown
- Requires continuous adjustments and optimization to remain effective
Turtle Trading vs. Modern Trading Techniques🐢
| Turtle Trading | Modern Trading Techniques |
|---|---|
| Focused on trend-following strategies | Incorporates a variety of strategies, including mean reversion and algorithmic trading |
| Relied on specific breakouts and volatility for entry and exit points | Utilizes advanced technical indicators, machine learning, and artificial intelligence to optimize entry and exit points |
| Manual adjustments and optimization were required | Automated systems and backtesting tools allow for more efficient optimization and strategy development |
| Primarily focused on commodities and futures markets | Applicable across various markets, including stocks, forex, and cryptocurrencies |
Final words on Turtle Trading
Turtle Trading is an impressive story of two legendary commodity traders. It proves that consistency is important in trading. Can you apply turtle rules in your trading even without Dennis's training? Of course, you can. The market goes up and down. You should enter a position on the breakout and exit when the price of the underlying asset reverses or consolidates.
There are certain elements to take as lessons from the history of turtles.
Have a good understanding of the strategies you are using
By knowing the mechanics of the methods you use, you can modify and improve them. You also know what results you can expect in the various situations observed on the chart.
Manage your risks
Wherever and whoever mentions what Turtle Trading is, there is always a message about not taking more than 1% risk in a single trade. More risk in a single trade can lead to excessive capital drawdowns in the long run. Such risks must be reckoned with. After all, every strategy has better and weaker periods.
Remember about false breakouts. It is said that with this method you should expect 40 to 50% accuracy. Go to the IQ Option demo account, test the Turtle strategy and decide whether it is something for you.
Wish you success!
Frequently Asked Questions about Turtle Trading🤔
- Q: What was the main goal of the Turtle Trading experiment?
- A: The goal was to test if trading skills could be taught and if individuals without prior experience could become successful traders by following a systematic approach.
- Q: How did the Turtle Trading strategy determine entry and exit points?
- A: The strategy relied on breakouts from a specific range and volatility measurements to establish entry and exit points.
- Q: Can the Turtle Trading strategy still be profitable in today's market?
- A: While the original strategy may not be as effective, adaptations and optimizations can make it applicable to modern markets.
- Q: How does Turtle Trading compare to modern trading techniques?
- A: Turtle Trading focused on trend-following strategies and required manual adjustments, while modern techniques use a variety of strategies and tools, including machine learning and artificial intelligence for optimization.
- Q: Are there any major drawbacks to the Turtle Trading strategy?
- A: The strategy can generate false breakout signals, leading to losses, and requires continuous adjustments to remain effective.