Do the Turtle Trading Rules Still Work

We’re all aware of the legendary Turtle Traders and the rules they strictly followed for their trades. But, with evolving time, the question that pops up is, do the Turtle Trading Rules still work?

Yes, the Turtle Trading Rules do still work, but with a little caution. These rules, based on trend following, are effective; however, they must be adjusted and modified according to the current market state.

Lurch ahead; let’s delve deeper into turtle trading rules, their possible practical scenarios, and how they adapt to the changing trends of the market.

Revealing the Turtle Trade – An Overview

The concept of the Turtle Trading system was devised by Richard Dennis and William Eckhardt in the 1980s. Its premise revolves around the belief that anyone can be taught to trade successfully if they strictly follow a set of rule-based strategies. Dennis specifically developed this system to prove individuals could learn to trade using a simple rule-based strategy, much like turtles in a biological experiment.

The primary driving force behind the Turtle Trading system is trend following. Simply put, it advocates buying an asset when its price rises above its historical maximum (going long) or selling an asset when its price falls below its historical minimum (going short). This is done while maintaining a strict exit strategy to limit losses and secure gains.

The Turtle Trading system is made up of two different systems – System 1 and System 2. System 1 is the faster system with shorter timeframes, usually a 20-day breakout, and System 2 is the longer term system based on a 55-day breakout. These systems follow the notion that a tight stop order will protect the trader from large losses, while a loose stop order will maximize profits due to increased market movement.

The system also has rules for adding to trades (pyramiding), limiting trading size, and offsetting multiple trades. For instance, pyramiding allows adding more units to a winning position but the addition of units takes place when the market is favorable. By doing so, traders are essentially compounding their winnings.

A significant aspect of the Turtle Trading system is its ability to adjust a trader’s position according to the market’s volatility. This essentially means that in periods of high-market volatility, the number of contracts traded would be fewer. Conversely, when volatility is low, the number of contracts traded would be more.

Initially, the Turtle Trading rules were kept a secret, only made available to a select group who Dennis and Eckhardt personally tutored. However, they were ultimately revealed to the public in the late 20th century and have since been widely analyzed and debated. The question now is – do these seminal trading rules still apply and work in today’s diverse and fast-paced market environment?

Deconstructing the Turtle Trading System

The turtle trading system is a renowned trading strategy that was conceptualized by Richard Dennis and William Eckhardt. The idea behind this strategy originated from an ongoing debate between these two individuals regarding whether successful traders are born or can be taught. In order to settle their argument, they came up with an experiment: to educate a group of aspiring traders, who they later on referred to as the “Turtles,” and see if they can succeed through training and mentorship.

Understanding the principle behind the Turtle Trading Strategy is essential to answer our main question – whether it still works or not in today’s rapidly changing market. The core concept of the Turtle System lies in trend following. Simply put, it is a strategy that allows traders to benefit from big, volatile price movements in the financial markets. The specific details of the strategy can vary, but the fundamental premise is always the same – buy a security when its trending up and sell when it’s trending down.

The entry and exit rules in this system were also quite straightforward. The Turtles were trained to buy when a market exceeded the highest price it had reached in the preceding 20 days (a 20-day high), and to sell when a market went below the lowest price of the previous 20 days (a 20-day low). It was frequent to see Turtles holding onto their positions for weeks or even months, depending on how long the trend lasted.

The Turtle System’s success was greatly influenced by the disciplined application of risk management principles. These include only risking a small percentage of total capital on any single trade and adjusting trade size according to market volatility. This risk management model enabled the Turtles to endure the inevitable losses and keep themselves in the game until they could capitalize on the big trend.

Success Stories: The Birth of Trading Legends

The Turtle Trading system owes its origin to Richard Dennis, a prominent commodity trader, who believed that trading was a skill that could be learned, not necessarily an innate talent. To prove his belief true, he undertook what came to be known as the ‘Turtle experiment’, consequently leading to the birth of a legendary trading system. The inception of this system and its followers led to the birth of several trading legends whose success stories inspire traders to this day.

In the early 1980s, Richard Dennis put out an advertisement seeking novice traders. His plan was to teach them his rules of trading and let them loose in the markets. Out of thousands of applicants, Dennis and his partner, William Eckhardt, selected around 14 traders which came to be famously known as ‘Turtles’. These Turtles were asked to implement a simple trend-following strategy that involved buying an asset when its price exceeded the highest price of the previous 20 days, or selling it if the price went below the lowest price of previous 20 days.

The experiment turned out as Dennis expected. The group of novices ended up making an aggregated profit of approximately $120 million over the course of four years. This led Dennis to conclude that with the right rules, anybody could become a profitable trader. Among the original Turtles, some went on to make a significant impact in the trading world.

Consider the instance of Curtis Faith. He was only 19 years old when he was selected as a Turtle. Curtis ended up being the most successful of all Turtles, earning more than $30 million for Dennis. His success story widely discusses the fact that he had no prior experience in trading. However, adherence to the system and disciple led him to unprecedented success in commodity trading.

Another notable success story from the Turtles is that of Jerry Parker. After the experiment ended, he founded Chesapeake Capital Corporation, a significantly profitable hedge fund that managed up to $2 billion in its peak year 2006. Parker’s success is often attributed to faithfully following the rules Dennis taught, clearly demonstrating that it’s not who you are but how you trade that matters in the trading world.

The stories of these trading legends underline the importance of a disciplined approach in trading. They are the epitome of what can be achieved with the right strategy and a relentless focus on following the rules, no matter what the market conditions are.

Transitioning to Modern Markets: Do the Rules Still Apply?

The Turtle Trading system, developed by Richard Dennis and William Eckhardt, is often held up as a prime example of a successful trend-following strategy. It originated in the 1980s, a time when markets were significantly different from what they are today. Therefore, the question arises – do the turtle trading rules still work in modern, evolved markets?

To answer this question, let us first understand how the market dynamics have changed over time.

A Look at Market Evolution since the Turtle Era

The financial markets of the 1980s were primarily characterized by less data availability and slower paced trading, compared to the rapidly changing, data-driven markets of today. Another major difference is the level of market efficiency. Modern markets, with the advent of technology, have become highly efficient, adjusting quickly to new information, making it significantly harder for traders to consistently outperform.

Digitalization has democratized access to financial markets, leading to increased competition, and the rise of algorithmic and high-frequency trading has accelerated both trade execution and information dissemination. These are all conditions that the original Turtle Trading system did not have to encounter or adapt to.

Evaluating Current Trading Parameters with the Turtle System

Despite these stark changes in the market environment, elements of the Turtle Trading methodology still hold relevance. The Turtles traded on strong, sustained price movements, a phenomenon that can still be observed in modern markets. The importance of risk management, a core principle of the Turtle strategy, is as vital today as it was when the rules were first formulated.

However, a strict adherence to the original Turtle rules may not yield the same exceptional returns in today’s environment. For instance, the Turtle strategy favours long-term trend following, while today’s markets often reflect shorter-term trends and price swings, due to the higher trading frequency.

To make the Turtle system work today, it may need to be adjusted and adapted in response to current market conditions. For example, one could experiment with shorter look-back periods for signals, or adjust volatility-based position sizing to better fit today’s market dynamics.

Thus, while the Turtle Trading rules might not provide the silver bullet for modern markets, their core principles may still be valuable when applied with appropriate modifications and adaptations.

Adapting the Turtle Trading Rules for Today

The original Turtle Trading rules were developed in the 1980s based on commodity futures. Commodities, even then, were a less frequently traded asset class, with positions held for weeks or months. This is vastly different from today’s trading environment where many traders focus on daily or even hourly movements.

Trading Frequency Adjustments

To adapt the Turtle Trading rules for modern markets, we must first adjust our perspective on trading frequency. One way to do this is to shorten the time frame for the breakout and rollback rules. For example, we could apply the breakout strategy based on hourly or daily charts instead of weekly ones, adapting to the faster-paced, high-volume trading environment of today.

Dealing with Increased Market Volatility

Another aspect of adapting the Turtle Rules to current trading platforms is dealing with increased market volatility. Volatility poses a risk, but it also presents an opportunity for profit, especially for trend following strategies like the Turtle Trading rules. This means traders can take the increased fluctuations of the modern stock market into account by using the Average True Range (ATR), or a similar measure of volatility, to adjust the size of their trading positions.

Reinterpreting Turtle Risk Management for Modern Portfolio Theory

The approach to risk management in the original Turtle System was unique for its time. It took the stance of risking only a small fixed percentage of the total portfolio on any single trade. In line with Modern Portfolio Theory (MPT), traders could interpret the Turtle Rules’ risk management guidelines as a call for asset diversification to reduce risk. The Turtles didn’t have access to the wide array of assets that we have today, their trading was mainly in commodities. But with today’s plethora of available assets – stocks, bonds, ETFs, forex – a reinterpreted Turtle trader would diversify across asset classes, geographies, and sectors. Such portfolio diversification is a key element of MPT, suggesting that optimized, risk-adjusted returns can be achieved by combining assets that do not perfectly correlate.

Moreover, in accordance with Modern Portfolio Theory, a Turtle Trader could apply the concept of risk parity to their position sizing. Instead of each position representing an equal dollar amount, each position would represent an equal amount of risk. This would potential bring the Turtle Trading system into alignment with current portfolio construction and risk management practices.

Critics & Supporters: The Debate on Turtle Trading Validity

When it comes to the efficacy and validity of Turtle Trading, there are clear divisions between critics and supporters. The debate primarily centers on whether these rules still work in the contemporary trading landscape or if they’ve devolved into an obsolete strategy of a time past.

On one side of the argument, supporters of Turtle Trading maintain that its principles are as useful and effective today as they were when Richard Dennis and William Eckhardt first devised them in the 1980s. These proponents contend that the core principle of trend following still holds true: markets, by nature, tend to move in trends, and profitability can be achieved by following these trends.

For instance, the New York-based fund manager John D. Mueller has been practicing the Turtle Trading strategies with reported success since 2000, suggesting that it may not be as outmoded as some believe.

On the other side, critics of the approach believe that the Turtle Trading rules have lost their sheen with time. They argue that these rules were developed in a different era and don’t account for various factors that currently influence trading, such as the prevalence of algorithmic trading and high-frequency trading.

Moreover, many critics point toward the evidence. In the 21st century, only a handful of traders have seen significant success with pure Turtle Trading strategies. Furthermore, analysis by the renowned financial historian Peter L. Bernstein found that trend-following strategies like Turtle Trading underperformed the S&P 500 by nearly 2% annually from 1985 until 2009.

Ultimately, the debate is yet to find common ground. However, it is evident that traders looking to take up the Turtle Trading system would need to adapt it to contemporary market conditions and potentially combine it with other strategies for the best results.

The Charm of Simplicity: Why Traders Still Follow the Turtles

The Turtle Traders were a brainchild of commodities trader Richard Dennis in the 1980’s. Dennis bet that he could teach a group of novice traders a simple, mechanical system of trading commodities, and make them successful. He was right. The Turtle Trading system has been a staple of trend followers ever since.

Benefits of a Disciplined, Systematic Approach

The Turtle Trading system is not about predicting market direction or timing market tops or bottoms. It’s about following trends based on pure price data and using strict money management rules. This disciplined and systematic approach could be a major contributing factor to why traders still use it.

Using a systematic approach helps traders remove emotion from trading decisions. With clear rules to follow, traders won’t second-guess their actions in the heat of the moment. It’s a critical factor, considering that emotions are one of the most vital contributors to trading losses. The Turtle Trading system provides rules for entry, exit and risk management, thus ensuring a disciplined approach.

The Appeal of a Time-Tested Method

Another reason why the Turtle Trading rules are still in use is the track record. The Turtles generated an average annual compound rate of return of over 80% during a four year period. However, as with any trading system, it has its drawdowns. The worst peak-to-valley drawdown during that period was about 40%. Despite this, the overall success of the system is what makes it appealing.

Many traders are attracted to the idea that a relatively simple system like Turtle Trading can yield substantial returns. It’s a proof that the complexities of forecasting future prices or the intricacies of detailed technical analysis aren’t necessary for successful trading. All you need is a disciplined approach to follow the system, patience to wait for the right signals and courage to take trades according to the rules.

Practical Approach: How to Apply Turtle Rules Today

The Turtle Trading Rules evolved from an experiment intended to prove that anyone could be taught to trade. The system’s success came from its simplicity and systematic approach. It has legendary roots and has proven its relevance over time, but can it still hold its weight in today’s fast-paced, tech-driven markets? Let’s explore how to apply the turtle trading rules in the current day trading scenario.

First, we must understand the basics. At its core, the Turtle Trading system is a trend-following strategy. The system involves purchasing a market when it surpasses its previous 20-day high, or selling when it drops below its 20-day low. This is done with strict money management rules involving position sizing and risk control.

In today’s trading landscape, the original turtle rules can still be applied, with a few adaptations to cope with market changes. One fundamental issue to consider would be the selection of markets. Turtles initially traded futures, but the rules can be adjusted to trade stocks, forex, and even cryptocurrency. When choosing markets, it is essential to select those with the liquidity necessary to invest large sums without influencing prices significantly.

The 20-day breakout rule remains relatively unchanged. However, a key point to note is that in the world of turtle trading, having patience is vital. It’s about waiting for the big market moves and capitalizing on them. In between, there could be periods of losing trades, so it’s crucial to manage your expectations and be ready for these drawdowns.

Regarding money and risk management, the original turtle rules suggested limiting exposure to a single market and across all correlated markets. Today, these rules can still be valid, but we also must consider new risk elements, like sudden market volatility due to global events, technology malfunctions, or internet interruptions. So, it is advisable to incorporate a modern risk management approach alongside the turtle rules.

Adopting the turtle trading system in today’s market condition involves a blend of old and new trading wisdom. It requires an understanding of modern markets’ complexities coupled with patience, discipline, and sound risk management. With these elements, there is certainly potential to successfully apply the turtle trading rules in the present context.

Take Home Lessons from the Turtle Trading Experiment

The Turtle Trading Experiment, initiated by commodities trader Richard Dennis in mid-1980s, is famous for proving that successful trading can be taught. Dennis and his partner William Eckhardt chose 21 men and women, who later became known as ‘turtles,’ and taught them some basic rules before giving them real money to manage. The results were astonishing, with this group making an average annual return of over 80% over four years.

The trading rules that the ‘turtles’ were taught are fairly simple at their core. They primarily followed a trend-following strategy, buying when prices increased above their recent range, and selling when they fell below their recent range. They also followed a strict risk management strategy, never risking more than 2% of their account on any trade. Furthermore, they diversified their investments across many markets to improve their chances of catching big trends.

Given the successful history of the Turtle Trading strategy, many traders and investors continue to question- Do the Turtle Trading rules still work today?

Whether or not these rules still work is a question that sparks much debate among financial professionals. Some argue that the markets have changed so much since the 1980s that the same rules can no longer be applied. The explosion of algorithmic trading, high-frequency trading, and increased market globalization are just a few of the factors that have drastically altered the landscape.

Despite these changes, there is evidence to suggest that the basic principles of Turtle Trading can still be effective if adapted to modern trading environments. A research paper published by the Federal Reserve Bank of St. Louis in 2017 showed that trend-following strategies, similar to those used by the turtles, have produced significant returns in the modern era. The paper further suggested that risk management and diversification were key elements to the success of these strategies.

Nevertheless, it’s important to note that while the underlying principles may still be relevant, they shouldn’t be applied blindly. Although the Turtle Trading system was incredibly successful in the mid-80s, every market condition is unique and must be met with thoughtful tactic adaptation. With this in mind, traders can take key lessons from the Turtle Trading rules – namely, the importance of following trends, the need for disciplined risk management, and the power of portfolio diversification.

Resources

https://www.academia.edu/28757265/The_Original_Turtle_Trading_Rules
https://digital.wpi.edu/downloads/nk322d937
https://www.uri.edu/news/2023/01/uri-students-research-finds-illegal-sale-of-pet-turtles-in-u-s-has-found-a-niche-on-the-web/