What is Turtle Trading?

The 1980s saw Richard Dennis, an American trader, who was well-known for his ability to trade a variety of markets, make an interesting wager with William Eckhardt. Eckhardt bet Dennis that he could teach anyone how to trade and grow, much like baby turtles in Asia. This was the turtle trading experiment. Let's see what it is.

The Turtle Trading Experiment

Dennis called his students "turtles" and gave them his money. He also taught many rules about trading. Dennis' experiment was designed to give traders a completely mechanical approach and a set rules that would help them avoid emotional judgments. It was designed to allow traders to place trades solely on rules.

Dennis argued that even if he published all of the rules in a newspaper, very few traders would read them because most traders don't follow rules strictly. He said that traders tend to only use trading rules for improvising and that if they don't follow them, it can impact the trade's performance.

What is turtle trading? Understanding the philosophy

To benefit from the market's continued momentum, traders often use the turtle trading strategy. This strategy can be used in many financial markets. It looks for breakouts to the upside and downside.

Dennis experimented with 14 'turtles' and decided to train them. His students learned how to make a mechanical strategy that follows rules and not rely on their intuition. He taught a group novice traders how to follow the rules. Those who succeeded were awarded $1 million of Dennis’ own money. Dennis called this the 'turtle trading' trial.

Take a look at the rules for turtle trading

The following rules were necessary for Dennis' "turtles" to succeed as traders.

1. The trading market rules

The first rule was about markets traded. The first rule was that the turtles must trade futures contracts. They also need to look for liquid markets. This would allow them to enter trades without having large orders. The turtles traded commodities and metals, as well as bonds, energy, currencies, and the S&P 500.

2. Position-sizing rule

The turtles used a position size algorithm to trade in this rule. The algorithm adjusted the trade size to reflect the market's dollar volatility and normalised the position's volatility. This rule was designed to improve diversification and ensure that all positions were the same regardless of market conditions.

3. The entry rule

The entries rule was the third rule in turtle trading. Dennis' students used two different entry methods. The first entry system used a 20-day breakout and was named the 20-day high/low. The second used a 55 day breakout. The turtles needed to make sure they received all signals. Missing even one signal could result in missing out on a big winner that could have a significant impact on the overall returns.

4. Stop-loss rule

Dennis showed his turtles how stop-loss works and asked them to remember to use it every time they lost. Before they could place a trade, they were required to establish their stop loss.

5. The exits rules

This rule was focused on exits. Dennis said that exiting too soon can limit your chances of winning, which is a mistake many trend-following traders make. The turtles were shown how to trade many times and how only a handful of trades could turn into huge winners. Other trades would result in minimal losses.

6. The tactics rules

The final rule of the turtle trading system was about tactics. The turtles learned a few details about using limit orders and dealing in fast-moving markets. They learned to wait patiently and not rush to place orders in an effort to get the highest trading price. Dennis taught them how to trade momentum by teaching them how to sell the weakest markets while buying the strongest.

Last note:

Although the turtle trading experiment's results may not have been perfect, it is clear that they provide valuable information. It is a fact that most traders can't separate emotions from rules, but only those who are able to do so will be successful traders.