Written by The Turtle Traders and Their Trading System: A Comprehensive Guide
Introduction
The Turtle Trading system is one of the most iconic and successful trading strategies in the history of financial markets. Developed in the 1980s by Richard Dennis and William Eckhardt, the system changed the way traders approached markets and risk management. What makes the story of the Turtle Traders remarkable is not just the success of the system but how it proved that ordinary people could learn to trade successfully with a structured set of rules.
In this article, we will explore the origins of the Turtle Trading system, the core principles behind it, how it works, and the real-world applications that led to its legendary success. Additionally, we will dive into the lessons that modern traders can learn from this historical experiment. By the end, you will have a comprehensive understanding of the Turtle Trading system, its strategy, and how it continues to influence financial markets today.
Chapter 1: The Origins of the Turtle Traders
The fascinating story of the Turtle Traders begins in the early 1980s, a period when Richard Dennis, a young and highly successful futures trader, and his partner William Eckhardt, a brilliant mathematician, disagreed on an important question: Are great traders born, or can they be made?
Richard Dennis believed that successful trading wasn’t about having an innate skill or talent; instead, it could be taught to anyone willing to follow a disciplined approach. Eckhardt, on the other hand, believed that traders had to possess a natural instinct or intuition to succeed. To settle this debate, Dennis proposed an experiment that would test the hypothesis that anyone could become a successful trader if given the right training.
Dennis decided to recruit a group of ordinary people, many with no prior experience in trading, and teach them how to trade using a systematic approach. He would train them for just two weeks, provide them with the capital to trade, and see if they could achieve the same level of success that he had. These individuals would come to be known as the “Turtles” (Dennis’ playful reference to the concept of “growing traders in a controlled environment”).
Dennis selected a group of individuals from diverse backgrounds, including a science teacher, a former bartender, and even some college graduates with little financial experience. After just two weeks of training, the Turtles were armed with a set of rules for trading that Dennis and Eckhardt had developed. The experiment quickly proved to be a success. The Turtles, following the rules and using the same strategies Dennis had employed, went on to generate millions of dollars in profits. The results not only validated Dennis’ theory that trading could be learned but also helped solidify his status as one of the most innovative traders of his time.
Chapter 2: The Philosophy Behind Turtle Trading
The Turtle Trading system is built on several core principles that distinguish it from other approaches to trading. The most important of these principles are trend following, risk management, and discipline. Let’s examine these in more detail.
1. Trend Following
At the heart of the Turtle Trading system is the concept of trend following. Dennis and Eckhardt believed that markets tend to move in trends, and the key to successful trading is identifying those trends early and capturing profits by trading in the direction of the trend. They subscribed to the idea that, once a trend is established, it is more likely to continue than reverse.
The Turtles’ core strategy was to buy when prices were in an uptrend (when they broke above certain resistance levels) and sell when prices were in a downtrend (when they broke below certain support levels). This approach sought to capture large price movements over time by focusing on the larger trend, rather than trying to predict short-term price fluctuations.
2. Risk Management
Another central element of the Turtle Trading system is risk management. Dennis and Eckhardt knew that, in order to be successful in the long run, a trader must protect their capital. The Turtles did this by using strict position sizing and stop-loss orders.
The Turtles’ risk management strategy involved determining the amount of capital to risk on each trade. They used a system based on volatility, measured by the Average True Range (ATR), to calculate how much risk they were willing to take on each trade. This approach ensured that they never risked too much on any one trade, regardless of the market’s volatility at any given time.
3. Discipline and Consistency
The Turtles were trained to follow the rules of the system without deviation. They were told that emotions and intuition should not play a role in their decision-making process. Instead, they were encouraged to remain disciplined and consistently adhere to the rules of the system, regardless of how the market behaved.
This aspect of the Turtle Trading system helped eliminate psychological factors like fear and greed, which can often cloud a trader’s judgment and lead to poor decision-making. Discipline and consistency were key to the Turtles’ long-term success, as the system was designed to generate profits through a high win rate over time, rather than relying on perfect timing for each individual trade.
Chapter 3: The Turtle Trading System Explained
The Turtle Trading system is a trend-following strategy that uses a combination of entry signals, exit signals, and risk management rules. Let’s break down the system’s key components in more detail.
1. Entry Signals: The Donchian Channel
The Turtles used the Donchian Channel, a technical indicator that tracks the highest high and the lowest low over a specific period of time, to identify potential entry points. The Donchian Channel is an effective way of capturing breakouts, which are often the beginning of significant trends.
The Turtles employed two variations of the Donchian Channel to signal entries:
- The 20-day breakout: The Turtles would buy when the price broke above the highest high of the last 20 days, signaling the beginning of an uptrend. Similarly, they would sell when the price broke below the lowest low of the last 20 days, signaling the beginning of a downtrend.
- The 55-day breakout: For a more conservative approach, the Turtles would look for a breakout above the highest high of the last 55 days. This was used for longer-term trends.
This dual approach helped the Turtles capture both short-term and long-term trends in various markets.
2. Exit Signals: The Trailing Stop
Once a trade was initiated, the Turtles used a trailing stop to lock in profits while allowing the trade to continue as long as the trend was intact. The trailing stop was based on the market’s volatility, as measured by the N-value, which was calculated using the Average True Range (ATR) over a specified period.
For example, if the N-value was 1.5 (indicating high volatility), the stop would be placed at 1.5 times the N-value below the highest point reached in the trade. This approach allowed the Turtles to ride trends for as long as they lasted, while still protecting their profits in case the market reversed.
3. Position Sizing: Risk Control
The Turtle Trading system’s risk management was closely tied to position sizing. The Turtles used a formula to determine how much capital to allocate to each trade, based on the market’s volatility (N-value) and their risk tolerance. The formula for position sizing was: Position Size=Account Equity×Risk Per TradeN-value×Dollar Value of ATR\text{Position Size} = \frac{\text{Account Equity} \times \text{Risk Per Trade}}{\text{N-value} \times \text{Dollar Value of ATR}}
This formula ensured that each trade risked the same amount of capital, regardless of the volatility of the underlying market. If the market was highly volatile (a larger N-value), the position size would be smaller. This helped mitigate the impact of volatility on the trader’s overall risk exposure.
Chapter 4: Real-World Applications of the Turtle Trading System
After their training, the Turtle Traders were set loose on live markets with real capital. They were provided with a significant amount of money to trade, and they used the Turtle Trading system to trade a wide variety of futures contracts, including commodities like oil, gold, and agricultural products, as well as stock indices, interest rates, and other financial instruments.
The results were stunning. Within a few years, the Turtles collectively made over $100 million in profits. The success of the experiment not only proved that trading could be taught but also that systematic, rule-based approaches to trading could be highly profitable.
While the Turtles’ story remains one of the most famous examples of successful trend-following trading, their methodology is still used by traders today. Many modern traders use the principles of Turtle Trading in combination with new technologies, like algorithmic trading platforms, to automate trades and optimize their risk management.
Chapter 5: Performance and Legacy
The Turtle Trading system proved to be highly successful in the long run. While individual performance varied, the overall results were impressive. On average, the Turtles generated annualized returns of around 30% over the four years they traded under Dennis’ guidance. This performance is remarkable, given the inherent risks involved in trading futures markets.
The Turtle Trading system’s success had a lasting impact on the world of finance. Many of the Turtles went on to create their own successful trading businesses, and the principles of trend-following and risk management became foundational to modern trading strategies.
The legacy of the Turtle Traders is still evident in the way that systematic trading, quantitative analysis, and trend-following approaches are used today. The system’s focus on removing emotion from trading and adhering to strict rules has influenced countless traders, both individual and institutional.
Conclusion
The Turtle Trading system remains one of the most influential trading strategies in the history of financial markets. By demonstrating that anyone could become a successful trader with the right training and discipline, the Turtles proved that trading success is not about having a special gift or intuition but about following a systematic approach.
The principles of the Turtle Trading system—trend following, risk management, and disciplined execution—are just as relevant today as they were when Richard Dennis and William Eckhardt first developed the system. Modern traders can still learn valuable lessons from the Turtle Traders about the importance of a structured, mechanical approach to trading and the need for consistency and discipline in the face of market volatility.
Whether you are just starting out in the world of trading or are an experienced professional, the Turtle Trading system offers timeless wisdom that can help you succeed in the financial markets.
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