What is Turtle Trading?

Around the world, the securities market has been a constant source of curiosity and experimentation. Various traders have developed strategies and patterns after prolonged research and experience. In this process, there have been some remarkable tales to tell. Turtle trading system is one such unique experiment.

Describe Turtle Trading.

Turtle trading was developed by an American trader, Richard Dennis as a fascinating wager with his friend William Eckhardt. Dennis was a renowned trader who had accumulated wealth of $100 million with an initial investment of $5000. He believed anyone could benefit from the securities market by following a set of rules whereas Eckhardt believed that Dennis had a special acumen that helped him amass wealth from the markets. Finally, Dennis set up the turtle trading experiment to settle the issue.

Dennis would shortlist a group of people, teach them a set of rules for investing and provide them with capital to trade. He was so confident about the rules that he gave the trader his own money for the experiment. Dennis rolled out an advertisement in The Wall Street Journal for a two-week course. Thousands of applicants responded to the advertisement to learn tricks of the trade. However, only fourteen traders would make it through. Dennis referred to them as ‘Turtles’ based on the turtle farms he had visited in Singapore. He opined that the traders would grow quickly and efficiently as farm-grown turtles.

Turtle Trading Rules

Dennis developed a set of turtle trading rules which were the foundation of his experiment. These include

  1. Turtles were required to trade in highly liquid markets to trade without any significant market movements in the absence of a large order. Furthermore, to maximize returns, large drawdowns were inevitable.
  2. The importance of diversification was vital. Turtles traded in the bond, commodities, energy and currencies market. Peculiar characteristics of different markets were closely studied by the traders to find the ideal fit.
  3. Turtles were told to specifically implement trend-following strategy. Hence, they bought futures by breaking out to the upside of trading range. Similarly, short sells were to be implemented in case of downside breakouts.
  4. The turtles used two different entry system – a 20-day breakout system and a 55-day breakout system. They were required to be proactive and ensured not to miss even a single opportunity. Missing out on a single signal could mean losing on a huge return which would affect the overall gains.
  5. Turtles were required to define stop loss before entering into a trade. They had to strictly adhere to the stop loss to avoid significant losses. The risk exposure on a single trade was restricted to a maximum of 2% of the total portfolio.
  6. The rule for exit was also defined. The turtles were instructed not to exit a trade early since that could limit the gains.
  7. Additionally, the turtles were also taught technical rules such as using limit orders while dealing in volatile markets and using position-sized algorithm to trade.
  8. Analyzing price movements was allocated higher importance as compared to relying on information from the newspapers or television commentators.

How does turtle trading work?

The turtle trading strategy is based on the above-mentioned rules. It relies on a completely mechanical and rules-drive approach. The idea is to eliminate emotions from the decision-making process. Traders are required to place orders based on rules alone. Most of them only follow trading rules to improvise when they deem it necessary. However, deviating from the rules contradicts the turtle trading strategy and may affect the performance of the trade.

Investors may apply these rules to maximize their profit potential. The basic premise is to purchase breakouts and square off the trade when the price starts consolidation. Alternatively, the reverse can also be applied. Short trades may be executed according to the same principles since a market witnesses both uptrends and downtrends. You can use any time frame for an entry signal. However, the exit signal must be considerably shorter to maximize profits. The essence of the turtle trading strategy is to take many trades, from which, only a few may turn into big winners, while the losses on most other trades were minimal.

The Turtle Trading Experiment

The results of the original turtle trading system experiment were varied. Two classes of turtles earned more than $175 million in only five years. Thus, it proved that even beginners without any prior experience can learn to trade successfully.

Some believe that the system still works well. A study concluded that if one invested $10,000 at the beginning of 2007 and followed the original turtle rules, one would have ended the year with $25,000. Thus, turtle trading is one of the most renowned strategies. However, with a change in market conditions, doubts arise whether this trading style will survive today’s market dynamics.

Frequently Asked Questions Expand All

Despite the benefits of the strategy, the risk involved is significantly higher. The drawdowns in the turtle trading system are comparatively deeper than other trading systems. The trend-following turtle trading strategy is subject to limitations because some breakouts tend to be false moves. As a result, a large number of trades are loss-making. According to past trends, turtle trading systems tends to be profitable in 40-50% of the cases. However, an investor must be prepared for large drawdowns and the risk associated with them.

The turtle trading strategy is a strategy that is based on its namesake experiment. It is a trend-following strategy that focuses on a mechanical, rule-driven approach.

Turtle trading experiment is an interesting lesson that proves that traders may earn great returns by sticking to a specific set of proven criteria. However, the results are close to flipping a coin. Thus, an investor must carefully analyze the risks and rewards involved in the strategy before execution. The experiment is described in detail above.