Turtle Trading System
The Turtle Trading System is a trading system created by Richard Dennis and Bill Eckhard with the aim of conducting an experiment with traders.
Towards the first half of the 1980s, Richard Dennis and Bill Eckhard (both mutual fund managers) were debating whether a trader is born or made. Dennis, famous for turning $ 1,600 into $ 200 million in just ten years, claimed that a trader was made. On the contrary, Echkard argued that to be a trader you had to be worth. I mean, you had to be genetically predisposed.
After talking at length, the two managers concluded that it was best to prove it. So they put a request in the Wall Street Journal to find a few people who would trade under their tutelage.
The origin of the name of the trading system
They received a lot of applications, but only selected a few to conduct the interview. Finally, they were left with 13 people. Of which 10 had been selected by interview and 3 purposely chosen by Richard Dennis.
“We are going to grow traders like turtles are grown in Singapore.” -Richard Dennis
These 13 people formed the experimental group. They were trained for 2 weeks and received small accounts with real money. Once they got through that process, they all received bills worth between $ 500,000 and $ 2 million.
According to what they say, the "turtles" not only did not lose money, but also achieved returns of 80% per year. Of course, how did the turtles operate?
The rules of the turtle trading system
The turtle trading system was characterized by being very simple. For Richard Dennis, a trading system must be simple and mechanical. In other words, no room should be left for subjective opinion or judgment. What the system dictates must be very clear and simple.
In this sense, the rules are divided into five sections:
The first thing is to determine in which market you are going to operate. The turtle trading system must be operated in very liquid markets. Its operations were fundamentally based on:
- Raw materials: Cocoa, coffee, sugar, cotton, gold, silver, copper, oil and gas.
- Bonds: 90-day, 10- and 30-year US Treasury
- Currencies: Swiss franc, German mark, British pound, French franc, Japanese yen, Canadian dollar, Eurodollar.
- Shares: Standard & Poor’s 500 Shares
It is the first step of money management. This section tells us how much to buy or sell. The goal is to manage risk appropriately. Money management strategies adapted position size based on market volatility. This volatility was measured according to the ATR (Average True Range) indicator. See Average True Range
Entry signals were based on the Donchian Channel technical indicator. Thus, we find short-term and long-term signals:
- The short-term signal is based on a 20-day Donchian channel breakout.
- The long-term signal is based on a 55-day Donchian channel breakout.
Of course, the turtle trading system uses stop loss. That is, in case the trade goes wrong, an order that closes the position at a loss. The stop loss was also based on volatility measures.
To exit profit positions (take profit order) the rule was very simple. When the price made the minimum of the last 10 or 20 days, the position was closed.
Additional provision on position size
Since the turtles operated with very large accounts, Richard Dennis gave some additional considerations for operating. When you operate with a very large number of contracts, you can alter the quotes yourself. The turtle trading system took this into account to avoid bad results that had nothing to do with the rules of the system.
It only allowed to operate with large positions, if the market was very liquid. Something that happened the vast majority of the time.
Does the turtle trading system work?
As Richard Dennis said in a book called Market Wizards: “If I published my trading system no one would follow it. The secret is consistency and discipline. Anyone can create a profitable trading system, but few have the willpower to stick with it even when things go wrong. "
Thanks to Curtis Faith (one of the turtles in the experiment) we now know what the exact rules of the turtle trading system are. A trader who managed to earn a lot of money thanks to this trading system.
However, to verify that it continues to work, it is advisable to quantitatively check if it works. That is, to program the trading rules and obtain the results. Do what is called a backtest.