Few people associate Eddie Murphy, Dan Ackroyd and the 1983 movie "Trading Places" with one of the greatest trading stories of all time. However, in the same year the movie was released, a real-life experiment along similar lines was carried out by legendary commodity traders Richard Dennis and William Eckhardt. In the end, life imitated art and the experiment proved that anyone can be taught to trade well. (For related reading, see Financial Careers According To Hollywood.)
The Turtle Experiment
By the early 1980s, Dennis was widely recognized in the trading world as an overwhelming success. He had turned an initial stake of less than $5,000 into more than $100 million. He and his partner, Eckhardt, had frequent discussions about their success. Dennis believed anyone could be taught to trade the futures markets, while Eckhardt countered that Dennis had a special gift that allowed him to profit from trading.
The experiment was set up by Dennis to finally settle this debate. Dennis would find a group of people to teach his rules to, and then have them trade with real money. Dennis believed so strongly in his ideas that he would actually give the traders his own money to trade. The training would last for two weeks and could be repeated over and over. He called his students "turtles" after recalling turtle farms he had visited in Singapore and deciding that he could grow traders as quickly and efficiently as farm-grown turtles.
Finding the Turtles
To settle the bet, Dennis placed an ad in The Wall Street Journal and thousands applied to learn trading at the feet of widely acknowledged masters in the world of commodity trading. Only 14 traders would be make it through the first "Turtle" program. No one knows the exact criteria Dennis used, but the process included a series of true-or-false questions; a few of which you can find below:
- The big money in trading is made when one can get long at lows after a big downtrend.
- It is not helpful to watch every quote in the markets one trades.
- Others' opinions of the market are good to follow.
- If one has $10,000 to risk, one ought to risk $2,500 on every trade.
- On initiation one should know precisely where to liquidate if a loss occurs.
For the record, according to the Turtle method, 1 and 3 are false; 2, 4, and 5 are true. (For more on turtle trading, see Trading Systems: Run With The Herd Or Be The Lone Wolf?)
Turtles were taught very specifically how to implement a trend-following strategy. The idea is that the "trend is your friend", so you should buy futures breaking out to the upside of trading ranges and sell short downside breakouts. In practice, this means, for example, buying new four-week highs as an entry signal. Figure 1 shows a typical turtle trading strategy. (For more, see Defining Active Trading.)
|Figure 1: Buying silver using a 40-day breakout led to a highly profitable trade in November 1979.|
|Source: Genesis Trade Navigator|
This trade was initiated on a new 40-day high. The exit signal was a close below the 20-day low. The exact parameters used by Dennis were kept secret for many years, and are now protected by various copyrights. In "The Complete TurtleTrader: The Legend, the Lessons, the Results" (2007), author Michael Covel offers some insights into the specific rules:
- Look at prices rather than relying on information from television or newspaper commentators to make your trading decisions.
- Have some flexibility in setting the parameters for your buy and sell signals. Test different parameters for different markets to find out what works best from your personal perspective.
- Plan your exit as you plan your entry. Know when you will take profits and when you will cut losses. (To learn more, read The Importance Of A Profit/Loss Plan.)
- Use the average true range to calculate volatility and use this to vary your position size. Take larger positions in less volatile markets and lessen your exposure to the most volatile markets. (For more insight, see Measure Volatility With Average True Range.)
- Don't ever risk more than 2% of your account on a single trade.
- If you want to make big returns, you need to get comfortable with large drawdowns.
Did It Work?
According to former turtle Russell Sands, as a group, the two classes of turtles personally trained by Dennis earned more than $175 million in only five years. Richard Dennis had proved beyond a doubt that beginners can learn to trade successfully. Sands contends that the system still works well, and said that if you started with $10,000 at the beginning of 2007 and followed the original turtle rules, you would have ended the year with $25,000.
Even without Dennis' help, individuals can apply the basic rules of turtle trading to their own trading. The general idea is to buy breakouts and close the trade when prices start consolidating or reverse. Short trades must be made according to the same principles under this system because a market experiences both uptrends and downtrends. While any time frame can be used for the entry signal, the exit signal needs to be significantly shorter in order to maximize profitable trades. (For more, see The Anatomy of Trading Breakouts.)
Despite its great successes, however, the downside to turtle trading is at least as great as the upside. Drawdowns should be expected with any trading system, but they tend to be especially deep with trend-following strategies. This is at least partly due to the fact that most breakouts tend be false moves, resulting in a large number of losing trades. In the end, practitioners say to expect to be correct 40-50% of the time and to be ready for large drawdowns.
The story of how a group of non-traders learned to trade for big profits is one of the great stock market legends. It's also a great lesson in how sticking to a specific set of proven criteria can help traders realize greater returns. In this case however, the results are close to flipping a coin, so it's up to decide if this strategy is for you.
Chart AdvisorInvestors are keeping an eye on the transportation industry. We'll take a look at the trend direction and how to trade it.
Chart AdvisorAgriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
Investing BasicsPlain vanilla is a term used in investing to describe the most basic types of financial instruments.
InvestingWest Texas Intermediate oil futures have recently made pronounced movements. What do they bode for the world market?
EconomicsThe Fed continues to delay normalizing rates, citing inflation concerns and “global economic and financial developments” in explaining its rationale.
Chart AdvisorThese stocks are tightly wound following big moves, and upon breakout more big moves could ensue.
Chart AdvisorNews out of Alcoa is causing active traders to turn toward base metals for opportunities. Before diving into the market, check out the charts of these three ETFs.
Mutual Funds & ETFsExplore analysis of some of the most popular inverse and leveraged-inverse ETFs that track equity indexes, and learn about the suitability of these ETFs.
Mutual Funds & ETFsDiscover analyses of the risks inherent to inverse exchange-traded funds (ETFs) that investors must understand before considering an investment in this type of ETF.
Chart AdvisorBased on the charts of two key ETFs, it appears that investors are moving out of emerging and frontier markets in favor of greater stability.
Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>