The History and Background of Turtle Trading

The Turtle Trading experiment of 1983, orchestrated by legendary commodity traders Richard Dennis and William Eckhardt, has left an indelible mark on the world of trading. Their ambitious venture aimed to prove that trading was a skill that could be taught to anyone, and it culminated in a group of individuals known as "turtles" who were entrusted with Dennis' own capital to trade in the financial markets. In this article, we delve into the history and background of Turtle Trading, exploring how the experiment came to be, the rules that governed it, and its enduring impact on trading strategies.

The Turtle Experiment

Before delving into the details of Turtle Trading, it's essential to understand the motivation behind this ambitious experiment. By the early 1980s, Richard Dennis had already achieved remarkable success in the world of trading. He had turned a meager initial investment of less than $5,000 into an impressive fortune exceeding $100 million. However, there was an ongoing debate between Dennis and his partner, William Eckhardt, about whether Dennis's success was attributable to a unique talent or if trading could be taught to others.

To settle this debate, Dennis proposed an audacious experiment. He aimed to find individuals willing to learn and adhere to his trading rules and then provide them with his own money to trade in the real markets. Dennis firmly believed in the replicability of his trading approach, while Eckhardt remained skeptical. The training program for these aspiring traders would span two weeks and could be repeated as needed. Dennis humorously referred to his students as "turtles," drawing inspiration from turtle farms he had visited in Singapore, where he observed that turtles grew steadily and efficiently.

Finding the Turtles

To assemble his group of turtles, Richard Dennis placed an advertisement in The Wall Street Journal, and the response was overwhelming. Thousands of individuals applied for the opportunity to learn from trading masters in the world of commodities. However, only 14 individuals were selected to participate in the first "Turtle" program. The exact criteria Dennis used for their selection remain a mystery, but they underwent a rigorous screening process that included answering a series of true-or-false questions.

Some of the questions posed in the selection process included:

1. The big money in trading is made when one can get long at lows after a big downtrend.
2. It is not helpful to watch every quote in the markets one trades.
3. Others' opinions of the market are good to follow.
4. If one has $10,000 to risk, one ought to risk $2,500 on every trade.
5. On initiation, one should know precisely where to liquidate if a loss occurs.

According to the Turtle method, questions 1 and 3 were deemed false, while questions 2, 4, and 5 were considered true.

The Rules of Turtle Trading

Turtle trading was founded on specific rules that guided the turtles in implementing a trend-following strategy. The central premise was "the trend is your friend," emphasizing buying futures when they broke out to the upside of trading ranges and selling short when they broke out to the downside. This approach called for buying new highs as entry signals, an example of which is illustrated in Figure 1.

Figure 1: Buying silver using a 40-day breakout led to a highly profitable trade in November 1979

This trade was initiated when silver reached a new 40-day high, and the exit signal was triggered by a close below the 20-day low. The exact parameters used by Dennis were shrouded in secrecy for many years, protected by various copyrights. However, some insights into the specific rules have been disclosed, as noted in Michael Covel's book "The Complete TurtleTrader: The Legend, the Lessons, the Results" (2007):

1. Look at prices rather than relying on information from television or newspaper commentators to make your trading decisions.
2. Have flexibility in setting parameters for your buy and sell signals; test different parameters for different markets.
3. Plan your exit strategy as meticulously as your entry; know when to take profits and when to cut losses.
4. Utilize the average true range to measure volatility and adjust your position size accordingly. Take larger positions in less volatile markets and reduce exposure in highly volatile markets.
5. Never risk more than 2% of your account on a single trade.

Did It Work?

The Turtle Trading experiment, as described by former turtle Russell Sands, was an incredible success. The two classes of turtles trained by Richard Dennis earned over $175 million in just five years. This unequivocally demonstrated that beginners could learn to trade successfully using a systematic approach. According to Sands, the turtle trading system still performs effectively, and he posits that following the original turtle rules, starting with $10,000 at the beginning of 2007 would result in an account balance of $25,000 by the year's end.

Even without the direct guidance of Richard Dennis, traders can apply the fundamental principles of turtle trading to their own strategies. The core idea revolves around buying breakouts and closing positions when prices begin to consolidate or reverse. The same principles apply to short trades, given that markets experience both uptrends and downtrends. While the entry signal can vary in time frame, the exit signal must be relatively short to maximize profitable trades.

The history and background of Turtle Trading is a captivating story of a trading experiment that challenged conventional wisdom and proved that trading could be taught. Richard Dennis's audacious venture, guided by a specific set of rules, unleashed a group of turtles who not only learned to trade successfully but also earned substantial profits. Despite its impressive achievements, turtle trading is not without its drawbacks, with significant drawdowns being part of the package. However, its enduring impact on trend-following strategies continues to influence traders and investors in the dynamic world of financial markets.

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