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Turtle Trading: A Comprehensive Guide

18 Oct 2023

During the early 1980s, when Dennis and his partner, Eckhardt, gained immense success in the trading world, they were caught in a debate. While Dennis thought that anyone could be taught to trade the futures markets, Eckhardt believed that it was Dennis’ special ability or gift that made him acquire profit from trading. 

To end this debate, Dennis set up an experiment called the Turtle experiment. Let’s discuss this experiment in detail in this blog. 

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What is Turtle Trading?

In the experiment, Dennis finds a group of people to teach his rules. Then, he has them trade with real money. He gave his students “Turtles” his own money to trade. That was a two-week-long training that could be repeated over and over. 

To end this bet, he also placed an ad in “The Wall Street Journal.” Seeing this ad, thousands of people applied to learn to trade. However, only 14 traders would make it through the first “Turtle” program. 

The experiment, called Turtle Trading, became a popular trend-following strategy that traders used to benefit from sustained momentum in the trading market. They look for breakouts, upsides, and downsides in several financial markets. 

What are the rules of Turtle Trading?

Dennis devised a unique set of rules for Turtle Trading: 

  • Trading in highly liquid markets, avoiding significant market fluctuations without substantial orders. 
  • Diversification is essential, with turtles engaging in bond, commodity, energy, and currency markets, meticulously studying each market’s distinct characteristics. 
  • Turtles were instructed to implement a trend-following strategy, purchasing futures when breaking out above the trading range and short selling during downside breakouts. 
  • Two entry systems were employed: a 20-day breakout system and a 55-day breakout system, ensuring no missed opportunities. 
  • Stop-loss orders were mandatory to limit losses, with risk exposure capped at 2% of the portfolio. 
  • Exiting trades prematurely was discouraged from maximizing gains. 
  • Technical rules, like using limit orders in volatile markets and employing position-sized algorithms, were also taught. 
  • Emphasizing the analysis of price movements over-relying on external sources like newspaper or television commentators. 

How Does Turtle Trading Work?

The Turtle Trading strategy is a rule-based approach that aims to eliminate emotions from decision-making. Traders strictly follow the rules, purchasing breakouts, and exiting trades during consolidation. Short trades can also be executed using the same principles. 

The strategy emphasizes taking multiple trades, with a few turning into significant winners and minimal losses on others. Investors can apply these rules to maximize profit potential, using different time frames for entry signals and shorter time frames for exit signals. 

Conclusion

Although the Turtle Trading experiment gives mixed results, it indeed provides essential information. This is because many traders cannot eliminate rules from emotions. However, those who can do it can truly become a successful trader.

 

Related Articles:  What is Range Trading: Principles and Technique | Mastering Market Dynamics with the Williams R Indicator | Maximizing Profits and Minimizing Risk with Marubozu Analysis

 

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