Legendary trader Richard Dennis turned ordinary men and women into top-class traders by teaching them everything he knew about trend-trading. Learn the rules of his system below. Also find out whether this strategy is still relevant today. For instance, once can trade stocks , currencies forex , or commodities gold, silver, oil.
Richard Dennis was a futures trader. Unlike other traders who took short term trades, Dennis held on to his positions for longer while riding out the market fluctuations.
He taught a handful of people how to trade successfully, and some of them are doing well today. How he made the money is still important, and can be combined with other risk management protocols to help control losses. He took a handful of men and women from obscurity, and taught them to trade futures. By his own admission in the iconic trading book Market Wizards , all these people were thoroughly screened beforehand.
In other words, they were deemed to have an aptitude for following the trading system that would be presented to them. It is one thing to know a strategy, it is a totally different thing to be able to implement it successfully. William believed that successful traders had innate gifts and talents while Richard Dennis believed good traders were made, not born. He got over applicants, out of which he selected just A few people he already knew were added to the group of 10, bringing the final total to He called them turtles because of an experience he had in Singapore, where he saw turtle farms efficiently raising and growing turtles.
He decided he would be able to raise his students just as efficiently. Successful traders rely on the use of systems, or a trading plan for success. By automating the process of trading, successful traders are able to remove the element of human unreliability. The turtles were taught how to implement a trend-following strategy. Trend-followers are like the surfers of the trading world, waiting in the sea for just the right wave to ride.
You just have to make sure you get off the wave before it crashes you on the rocks. The Turtle Trading system was a rules-based system.
It covered every aspect of trading, including what to trade, how much to buy or sell and when to get out of a winning or losing positions. The turtles traded in large, liquid markets. They had to, due to the size of the positions they were entering into.
They basically traded all these liquid markets except for meat and grains. Grains were off-limits because Dennis himself was maxing out his trading account.
A trader is limited on the number of options or futures they can have, and that meant there were none left for the turtles, who were trading under his name. One interesting note is that if a trader decided not to trade a commodity within a market, then they were to eschew that market entirely. The Turtle Traders used a very sophisticated position sizing algorithm. They would adjust the size of their position based on volatility of the asset.
Essentially, if a turtle amassed a position in a high volatility market, it would be offset by a position in a lower volatility one. The formula Dennis provided them helped them figure out how much of each contract they should have. In high volatility markets the turtles would inevitably have smaller amounts, and larger amounts of contracts in lower volatility markets.
Even if the volatility was lower in a market like Eurodollars, there was potential for big gains due to the relatively larger position that would be accumulated. A day ATR reading could also be used. Turtles were limited on how many units they could accumulate and remember, how many contracts are in a Unit will vary based on the market being traded, and on N , as they added to positions as they became more profitable.
A single position was limited to 4 units. If holding multiple positions in markets that were closely correlated , the trader could have a maximum of 6 unites in all the combined positions.
For holding position in multiple loosely correlated markets, the Turtles could have a total of 10 units. As a more overarching rule, Turtles were allowed a maximum of 12 units in any one direction long or short. Knowing when to enter a position is important. Surprisingly, the turtles used two very simple entry systems.
Short-term system based on day breakout. The Turtles entered one unit when the price moved above the high of the last 20 days, or dropped below the low of the last 20 days. The trade was skipped if the prior signal was a winner the price went 2N against the position, before triggering a day profitable exit, discussed in the Exit section.
Longer-term system based on day breakout. The Turtles entered one unit when the price moved above the high of the last 55 days, or dropped below the low of the last 55 days. This breakout method was used in case the day breakout was skipped for the reasons mentioned above. The turtles end a trade on the breakout, and always did so before the daily close of the markets. They were also told to be extremely strict about following the system rules, because even missing one or two winning trades in a year could totally change the complexion of their returns.
The Turtles used something called pyramiding, which is taking a larger position as the price moves favorably. This is based on the transaction price, and not the actual breakout price since there could be a difference. At the outset of each trade, a stop loss is placed 2N below the entry price if long, or 2N above the entry price if short. This typically means that the stop loss will always be 2N away from the most recent entry although it could vary slightly based on slippage.
There was another stop loss method called the Whipsaw. For system 1 , the exit was a 10 day low for long positions, and a 10 day high for short positions. For system 2 , the time period was extended to 20 days for both long and short positions.
It takes a lot of discipline to wait for a 10 or 20 day low before exiting a position. Avoiding the urge to get out but still sticking to a system is what results in the huge gains. Click here for further in-depth details on the turtle trading system from the eBook, Original Turtle Trading Rules. The question is whether or not it would work today. Trading Blox backtested the Turtle Trading System and found that returns were completely flat between and That dropped to On the other hand, Trading Tuition tested a Donchian trend following system and found that it performed quite well over a 12 year period spanning to Also, it reveals that small tweaks in the system can have a profound impact.
Trends still occur, and there are lots of methods and courses that take advantage of them. A number of indicators have been developed based on the Turtle Trader method. And depending how those those indicators are setup, they can still produce profitable trading opportunities, especially during trending periods.
Therefore, if using a system like this, it is recommended that traders have some sort of filter on their trades to help them stay out of choppy conditions…which can last for long periods of time. A group of new traders managed to make huge profits following a rules-based trend following system.
Some went on to even greater success. That said, trends still happen which means there are lots of opportunities for the trend trader. This is not investment advice, or a recommendation to buy or sell any particular securities. Nor it is necessarily an endorsement of the Turtle Trader strategy. Historical and simulated results may not necessarily reflect future performance. And I am not even a professional day trader!
What if someone plucked you off the street and made you a millionaire? To settle the bet, Dennis set up an experiment.
The Turtle Trading System Successful traders rely on the use of systems, or a trading plan for success. What Turtles traded The turtles traded in large, liquid markets. Treasury Bond and 90 Day U. Commodities like coffee, cocoa, sugar, cotton, crude oil, heating oil and unleaded gas. Precious metals like gold, silver and copper. How Turtles Entered Trades Knowing when to enter a position is important. Adding to Positions The Turtles used something called pyramiding, which is taking a larger position as the price moves favorably.
How Turtles Exited Positions At the outset of each trade, a stop loss is placed 2N below the entry price if long, or 2N above the entry price if short. The Turtles used an N-based system to exit their positions. Turns out, it probably would not.
Richard Dennis and Turtle Trading Strategy — Conclusion A group of new traders managed to make huge profits following a rules-based trend following system. It seems great traders can be made after all.More...