Imagine you’re in the world of trading in the 1980s. A famous experiment unfolds that changes the landscape of trading strategies forever. Dick Dennis and Bill Eckhardt, two notable commodities traders, launched a bold initiative to see if they could train ordinary individuals to become successful traders. They named their trainees “Turtles” and developed a strategy that has intrigued traders ever since.
I first came across turtle trading during a financial seminar. The speaker mentioned that Turtles earned substantial returns, and my curiosity piqued. I had always wondered if a simple strategy, void of any complex algorithms, could be a ticket to consistent profits. I did some research and found that the Turtles reportedly earned a median annual growth rate in excess of 60%. That’s huge when you consider that the average growth rate of the S&P 500 hovers around 10% annually.
To understand why the Turtle Trading strategy works, I dug into its mechanics. It adheres to a strict set of rules, primarily revolving around breakouts and moving averages. The core idea is to buy when prices break above a certain level and sell when they fall below another threshold. Some traders use a 20-day breakout while others prefer a 55-day breakout for longer-term trades. These simple yet effective rules eliminate emotional decision-making, which can significantly impact trading outcomes.
In the trading community, consistency is a valuable trait. The Turtle Trading system strives for consistency through its rigid guidelines. Traders don’t second guess themselves; they follow the rules to the letter. This approach minimizes the costs associated with trading errors and emotional biases. It’s documented that high-frequency traders and day traders often lose money due to erratic decision-making and overtrading. However, the Turtles’ consistency brought them impressive gains, sometimes achieving yearly returns of 80% or more.
The strategy isn’t devoid of risks; nothing in trading is. It requires a significant drawdown tolerance. The Turtles operated with a risk factor of up to 2% of their total capital on a single trade. This meant that they could experience significant short-term losses yet still come out profitable in the long run. Drawdowns of 20-30% were common, but the end-of-year profitability made these stomach-churning troughs worth enduring. The concept of drawdown is crucial here – it’s a measure of peak-to-trough decline during a specific period, offering a clear picture of the risk one can handle.
I’ve always seen parallels between Turtle Trading and momentum trading. In both strategies, traders ride trends, ensuring they don’t miss out on major price movements. A prime example is the tech boom in the 1990s. Traders who adhered to trend-following strategies, including Turtle Trading, capitalized on the soaring prices of tech stocks like Microsoft and Cisco. These stocks experienced exponential growth, rewarding patient trend-followers with astronomical returns.
One aspect I couldn’t overlook was the psychological element. Turtle Trading demands discipline. Dick Dennis and Bill Eckhardt did not just teach their trainees trading rules. They instilled a mindset of unwavering adherence to predefined parameters. The turtles were encouraged to stick to their parameters through thick and thin. Historical market data analysis confirms that deviating from the rules results in inconsistent results and often losses.
Technology’s role in modern trading can’t be ignored. Back when the Turtles executed trades via phone, they didn’t have access to automated trading platforms or advanced charting tools. Nowadays, we have platforms like MetaTrader and NinjaTrader, which offer extensive technical analysis tools and automated trading functionalities. Automation boosts efficiency by reducing the time spent on manual calculations and enabling faster trade executions, often resulting in better entry and exit prices. The turtles made the most of their time by focusing purely on strategy, not on tech setups, which is easier to replicate in today’s tech-savvy environment.
I was curious how contemporary traders view Turtle Trading. Trends indicate many still swear by it, adapting it slightly to fit today’s market conditions. They combine it with other indicators like the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD) to refine their entries and exits. Additionally, they often incorporate risk management tools to limit drawdowns, knowing the importance of capital preservation in long-term trading success. Combining these elements creates a more robust and reliable trading plan.
Access to information has democratized trading like never before. The original Turtles had to rely heavily on newsletters and very basic computer software to manage their trades. In contrast, anyone today can access heaps of historical data and backtesting tools for less than the cost of a daily cappuccino. Systems like QuantConnect and TradeStation provide platforms for traders to test their Turtle strategies against decades of market data, enhancing the robustness of their trading systems.
So how do you get started? The essential first step is to equip yourself with education and tools. You can find numerous resources online but focus on reputable sources that give you a solid foundation. Next, practice on paper trading accounts available on most modern trading platforms to fine-tune your strategy without financial risk. Finally, when you’re ready, start small and gradually scale your trading positions.
Trading is not merely about finding a strategy; it’s about consistently applying it. The Turtle Trading strategy equips you with the rules, but you must bring in the discipline. Remember the mantra: trade mechanically, manage risk, and most importantly, stay patient. It may not be a foolproof path to riches, but it’s grounded in historical success that still stands strong today.