Would the Turtle Trading

System Work Now?

Does turtle trading still work? During an economic downturn,
many traders claim to have effective strategies to beat the
system and still maximize profits. The turtle trading system
is one of those systems. This article will explain the turtle
trading system and how it worked for traders in the past. In
addition, this article will demonstrate whether turtle trading
could work in this volatile, coronavirus-addled market.

What is turtle trading?

When he met fellow trader, William Eckhardt, Dennis asserted

that traders could be grown as easily as turtles on a farm
that he saw in Singapore. (So, that’s the origin story of
turtle trading’s name.) Eckhardt disagreed and thought that
traders like Dennis had a natural gift. As a result of the
disagreement, they decided to bet and see if Dennis could
train random people to trade as well as him.

The turtle trading system started in 1983. ( Cue the Trading

Places soundtrack.) Commodity trader Richard Dennis believed
that anyone could be taught to trade to be an expert trader
like him during the go-go time of trading in the 80’s. Richard
became a legendary trader by the age of 26. During his time on
the Chicago Mercantile Exchange, he built his net worth up to
a staggering $100 million.

As Dennis noted in the book, Market Wizards, “I always say

that you could publish my trading rules in the newspaper and
no one would follow them. The key is consistency and
discipline. Almost anybody can make up a list of rules that
are 80% as good as what we taught our people. What they
couldn’t do is give them the confidence to stick to those
rules even when things are going bad.”

Who really started turtle trading?

While Dennis popularized turtle trading, Richard Donchian is
the father of trend trading. Donchian started the system in
the 1960’s with the following weekly trading rule:

“When the price moves above the high of two previous calendar
weeks (the optimum number of weeks varies by commodity), cover
your short positions and buy. When the price breaks below the
low of the two previous calendar weeks, liquidate your long
position and sell short.”

Donchian had an earlier system of risk-averse trend trading,

but Dennis perfected the turtle trading system.
How did Dennis find his turtles?
When Dennis started the turtle trading experiment, he placed
an ad in The Wall Street Journal and found 13 “turtles” out of
the thousands who applied. He tested them with a series of
true-or-false questions. Five of them are below.

1. Others’ opinions of the markets are good to follow.

2. Trades in big money are made when one could get long at
lows after a big downtrend.
3. An investor should know where to liquidate if a loss
happens.
4. It is not helpful to watch every quote for an investor’s
trading in the markets.
5. If an investor has $10,000 to risk, an investor should
risk $2,500 on every trade.

Dennis chose investors to be turtle traders if they chose 2,4,

5 as true and 1 and 3 as false.

How else did Dennis attract his

turtles?
Dennis placed a wide-ranging advertisement in the Wall Street
Journal. The ad looked like this:

Richard J. Dennis of C&D Commodities is accepting applications

for the position of Commodity Futures Trader to expand his
established group of traders. Mr. Dennis and his associates
will train a small group of applicants in his proprietary
trading concepts. Successful candidates will then trade solely
for Mr. Dennis: they will not be allowed to trade futures for
themselves or others. Traders will be paid a percentage of
their trading profits, and will be allowed a small draw. Prior
experience in trading will be considered, but is not
necessary. Applicants should send a brief resume with one
sentence giving their reasons for applying to: C&D Commodities
141 W. Jackson, Suite 2313 Chicago, IL 60604 Attn: Dale
Dellutri Applications must be received by October 1, 1984. No
telephone calls will be accepted.

Who were the original turtle

traders?
One of the original traders, Michael Cavallo, recalled the
simplicity of the advertisement.

“The ad looked like the New York Yankees looking for a

starting shortstop,” said Cavallo.

Cavallo was one of the turtles from very diverse backgrounds.

Dennis not only chose turtles from diverse backgrounds but
also had diversity in gender as well. In addition to male
traders, Dennis chose women to be turtles during a time when
there were few women in trading. Cavallo was a commodities
trader, but many of the traders were blue-collar workers like
Jim DiMaria. DiMaria was grateful for the opportunity to learn
from Dennis.

“That was enough to pay my grocery bills and I knew that was
going to be secure,” DiMaria said.

Another turtle, Michael Shannon, was an unsuccessful broker

until he became a turtle trader. He also noted that the
traders learned a lot about discipline from Dennis.

“We’re purely technicians,” said Shannon. “Dennis taught us to

be consistent, disciplined and execute the signals that come
up and he was right.

What were the turtle trading system

requirements?
After Dennis found his turtles, he gave $1 million of his own
money to invest in their own accounts. Dennis placed an
emphasis on mechanical trading over emotional trading. In
addition to purely technical training, he also downplayed the
importance of following financial reports on TV or in
financial reports. ( No doubt, if Twitter was around, he would
have disapproved of that, too.) Dennis put little faith in
financial analysis.

‘You don’t get any profit from fundamental analysis. You get
profit from buying and selling. So why stick with the
appearance when you can go right to the reality of price?”
said Dennis.

They could trade a maximum of 12 contracts a day for a month.

There were six main turtle trading rules.

What were the turtle trading system

rules?
1. Markets-What to buy or sell. Dennis told investors to
invest in all major stocks, bonds, metals, commodities,
and currencies. The turtles minimized the risk in
multiple markets.
2. Position Sizing–How much to buy or sell. The turtles
traded using a position-sized algorithm. The system
looked at a 20-day exponential moving average true
range. Turtles used that system to gauge the
unpredictability of the markets. The turtles were
trained to expand their positions when the market
volatility was low. They traded in just 1% of the total
equity of their accounts.
3. Entries–When to buy or sell. The turtles used two
different entry strategies. The first entry system was a
 20-day high or low. The second was a 55-day breakout
entry strategy. Automatic systems create entry systems.
Dennis told the traders to take all the signals on offer
so they wouldn’t diminish the returns.
4. Stops-When to get out of a losing position. Dennis
taught the turtles to stop losses whenever possible. A
pivotal part of stop losses was determining them before
the traders’ losses became too big.
5. Exits-When to get out of a winning position. There were
two exit rules. The first rule had a 10-day low for
short positions. The second rule had a 20-day/high low
for long positions.
6. Tactics-How to buy or sell. Dennis taught traders about
the psychological aspects or turtle trading. He also
taught his turtles to exercise patience while placing
orders during market volatility.

This TradingSim chart shows an example of trading through

trend following.

Riding the Trend

Did turtle trading work when it
first started?
Turtle trading had mixed results for the traders. One of the
turtles, Richard Sands, claims the group netted $175 million
using the system. Another trader, Michael Shannon, noted that
despite the discipline they were taught, there was a lot of
volatility.

“There are days when you take a significant hit and there are
days when you make lots of money and of those the days when
you make lots of money is probably the most psychologically
damaging because suddenly you become fearless.”

How did trend following help turtle

traders?
Shannon says he made about $3 million during his four years
under Dennis’ tutelage.

Trend following was key to the traders. “The trend is your

friend” is a mantra of turtle traders. That belief means that
traders can follow trends of growth or value stocks to predict
when the next bull or bear market will happen. Shannon noted
the simplicity of trend trading.

“The market being in a trend is the main thing that eventually

gets us in a trade. That is a pretty simple idea. Being
consistent and making sure you do that all the time is
probably more important than the particular characteristics
you use to define the trend. Whatever method you use to enter
trades, the most critical thing is that if there is a major
trend, your approach should assure that you get in that
trend,” said Shannon.

Even if the trends plummeted, traders still made a profit.

Author Michael Covel, who wrote a must-read book about turtle
trading, The Complete Turtle Trader, noted that turtle trading
worked for most of the first traders.

“Once you recognize that market moves are random you simply
need to put yourself in a position where you can capitalize on
a move when it happens,” explained Covel.

“Seven out of ten will be dogs but three will make money and
trend followers know that the winners will pay for the losses
and give them a tidy profit,” added Covel.

What are the key tenets of trend

trading?
Financial experts like Ali Hashemian noted that trend
following is a systemic and methodical way to trade.

“Trend trading is a systematic approach to investing based on

an asset’s current momentum. “A number of different trade
signals can be used, and traditionally there are set rules and
risk controls put into place when using this trading
strategy. Simply put, this trading style captures gains by
riding the upward or downward trend in an investment,” said
Hashemian.

While many day traders may want to just use the system for
stocks, Hashemian says most trend trading can mostly be for
futures or commodities.

“Trend trading is commonly utilized by commodity traders,”

said Hashemian. “Most often this trading style will include
price calculations, moving averages, and take-profit or stop-
loss provisions. Traders will use price movement and technical
tools to determine trading signals.”

“Signals can often cause a trade too soon, and thus full
potential gains are not always captured,” said Hashemian.
How can turtle traders identify a
trend?
There are three types of primary trends that turtle traders
can monitor to make trades.

1. Uptrends happen when stock prices increase. Turtle

traders can go long on the stock as it’s rising.
2. Downtrends happen when a stock is falling. A trend
trader can go short on a stock’s falling price.
3. Sideways trends happen when stocks are reaching neither
higher or lower points. Turtle traders may not act on
these trends, but day traders who want to jump on short-
term market movements may want to move on sideways
trends.

What system can turtle traders use

to monitor stocks?
The turtle system used the Donchian Channel, a trend-following
indicator. When turtle traders use the Donchian Channel , they
usually set the indicator to monitor stocks over a 20-day
price range. The original turtles traded during a 20-day
breakout. However, they would only trade if there wasn’t a
trend from the previous 20-day breakout. Turtles felt that if
the previous trend couldn’t predict a breakout, the next
breakout would produce a trend. Traders felt that they were
minimizing risk if there wasn’t a previous breakout.

The 55-day Donchian channel indicator was added to catch more

long-term emerging trends in the markets. Traders didn’t have
to wait for a breakout to fail before making a trade. The
Donchian Channel indicator is still used today by many
traders.

This TradingSim chart shows how the Donchian Channel can be

used for low-volatility stocks.

Donchian Channel with Low Volatility Stocks

What are the top trend indicators

for turtle trading?
The Donchian Channel is a moving average indicator. Moving
average indicators are just one of the many trend indicators.
Here are three of the most popular trend indicators to help
turtles trade and track trends.

1.Moving average indicators find the average price of a stock

over a timeframe, such as 20 or 55 days. It can predict past
trends to help traders track trends better.

2.Average directional indexes track trends on a scale from 0

to 100. Values that range from 25 to 100 indicate a good trend
for stocks. Values under 25 indicate weaker trends in stocks.

3.Relative strength index identifies momentum in overbought

signals. They’re also used to identify momentum in prices. The
relative strength index operates on a scale from 0 to 100.
When a stock is overbought, the indicator is above 70. A stock
is underbought if it’s under 30.

Why was the turtle trading system

successful for some traders?
Trader Mike Martin noted the simplicity of the turtle trading
system. Because the turtles only invested about 2% on a single
trade, the turtles weren’t hastily risking too much of their
money.

“The Turtle rules consisted therefore of a trend-following

system of entries, exits and risk management. The model was
built to catch the middle of the move and although Turtle
trading results were volatile, the group was always managing
risk. In essence, risk management was everything,” said
Martin.

“The system is genius in its simplicity. A certain

mathematical elegance can be found in its use of ATR [Average
True Range] for entries, exits and position sizes and what you
get out of each is up to you,” concludes Martin.

Shannon also believes that turtle trading was effective for

him and other traders. However, the trading system didn’t work
for all traders.

Why did the turtle trading system

fail for some traders?

While some turtle traders made a profit when they were with
Dennis, once they struck out on their own, the opposite
happened.

“Interestingly the Turtles all made big money while they were
working for Richard Dennis. However in 1988 when they went out
on their own things it was another story,” says Covel.

“Many didn’t stick with it and fell apart. So even though

there was a mechanical system that they all knew worked, at
the end of the day other factors such as character issues
became their downfall,” added Covel.

The overriding theme seems to be that systems may not change,

but the market does. Financial analyst Mark Biernat noted that
the turtle trading system may not work for two reasons.
Ironically, the success of the program means it’s easier for
other traders to copy. Copycats can alter the system and
change a winning formula.
Biernet believes that the turtle trading system worked well
for traders until 1996, when newer trading technology may have
replaced the older trading systems of the 1980’s. He also
asserts that the blue-chip stocks that were prominent in the
80’s like GM (NYSE:GM) are not as dominant as they used to be
now.

This TradingSim chart shows an example of the blue-chip stocks

the turtles traded.

Blue Chip Stocks

Does turtle trading still work in

today’s market?
As Al from TradingSim noted in an earlier article about trend
trading, day traders may have to adjust their fast-paced
trading schedule to move at, well, a turtle’s pace. While the
slower pace may have worked with a more primitive trading
system in the original turtle’s time, it may be different for
more active traders. Busy traders tend to take action more
quickly after monitoring the markets all day. However, turtle
traders can watch trends develop for weeks, months, or even
years.

While turtle trading worked in the 80’s, there are differing

opinions about whether the turtle trading system would work
now. In this era of Wall Street volatility, Dennis himself
acknowledged that the turtle trading system could possibly
work now. In an interview in 2018 before the current
unpredictability, he noted could be harder to implement now
because there was less volatility in the market two years ago.

“Well good luck with that one. The markets have changed a lot.
What works is changing and is a bit of a problem, but what’s
more of a problem is the lack of volatility. Volatility seems
to me to have trailed off over the years intermittently. You
know, I’d rather have the volatility back. I mean that’s a
variable you can’t control, but I think that it’s more
important than adjusting the system, although adjusting the
system is important too,” said Dennis.

Original turtle trader says system

is evergreen
Jerry Parker, a disciple of Dennis and one of the original
turtle investors, believes that turtle trading is timeless. He
believes that the pivotal tenet of risk management when
trading stocks and commodities is pivotal.

In an interview in 2018, Parker asserted that the main

philosophy of turtle trading can be implemented during a bull
market or a bear market.

“Well, I would say the basic philosophy hasn’t changed. You’re

continuing to do research, finding robust systems, and that
means systems with the least amount of parameters that tell
you how to initiate, liquidate, or stay out of a trade. We’re
always looking to build systems that are based on momentum or
based on range dependent discrete time frames where you’re
confirming that a trend is in place”, said Parker.

“So, you’re always looking to capture directional price

movement. Obviously, managing risk is paramount, so you manage
risk from the trade size, you limit it in the markets and
sectors that you trade,” added Parker.

Parker also said that the risk management strategy can be

tweaked to adapt to today’s stock market.

“We have a risk management concept that overlays the portfolio

that’s based on marginal utility. So, we’re harvesting profits
along the way which is very different than what we did learn
in the original Turtle trading programs. We’re still doing the
same things, just a little bit differently than we used to,”
said Parker.

Is turtle trading past its prime?

Gruppe Senioren mit Rentnern am Rollator und mit Gehstock

While Parker claims turtle trading is timeless, other
financial experts say that turtle trading went out with
Jordache Jeans. Trader Scott Michael Cole believes that turtle
trading was innovative in the 1980’s, but wouldn’t be
effective now. He believes that the turtles had fewer
contracts to hold in a long or short position than traders
have now. They only had 12 contracts, while there are many
more for today’s traders. Therefore, Cole believes that turtle
trading wouldn’t work now.

He contends that inflation was higher and there were more

trades to follow in the 1980’s than there are now. Cole
believes that turtle trading was effective when Dennis first
started. However, with the current low inflation, turtle
trading may not be as profitable as it was 35 years ago.

Turtle trading isn’t perfect, not even for the king of the
turtles. Dennis himself lost $10 million during the Black
Monday crash of 1987. He also had to settle a $2.5 million
lawsuit brought by investors. The investors said that Dennis
himself wasn’t following the turtle trading rules. Dennis
settled the lawsuit with the investors, but denied any
wrongdoing.

With fewer trends in the current markets, there is also only

about a 40% profit from turtle trading. Traders can expect a
60% loss on average. Turtle trading critics argue that while
trend following was profitable in the 1980’s with big stocks
like GM (NYSE:GM), there isn’t as much of a payoff now.

Turtle trading could work for

patient investors
While there are downsides to turtle trading, there can upsides
if investors are patient. Some financial experts note that
there are four key facts to remember for investors.

1. Take time with trends. Trend following means catching

the trend right in the middle. Don’t rush into trends at
 the beginning and don’t come into the tail-end of the
trend, either.
2. Position sizing should be minimal. In the current
volatile stock market, keep each position small. Only
risking 1 or 2% of funds on a trade can reduce large
losses.
3. Diversification is key. Diversification is pivotal to
turtle trading. The turtle traders of the 80’s invested
in a wide array of assets, from stocks to foreign
currency.
4. Capitalization. Turtle traders don’t need money from
Richard Dennis, but they do need a good investing fund
to make trades. Because this is low-risk, small-reward
investing, emerging turtle traders need a substantial
trading nest egg to soften the blow of trading losses,
especially during market volatility.

Uptrends turtle traders could monitor

Is there a psychology to turtle

trading?
While the Donchian Channel may be an effective tool to measure
turtle trading, there were other factors important to the
turtle trading system. The turtle system may have worked or
not worked for traders because of psychological reasons
instead of financial ones. Shannon noted that there was a
“psychological makeup for trading” that outweighed any broker
experience.

Dennis noted that mental discipline was just as important to

turtle trading as following his rules.

“I always say that you could publish my trading rules in the

newspaper and no one would follow them. The key is consistency
and discipline. Almost anybody can make up a list of rules
that are 80% as good as what we taught our people. What they
couldn’t do is give them the confidence to stick to those
rules even when things are going bad,” said Dennis.

Slow and steady rule-following wins

trading race
Dennis noted that the psychological aspect of turtle trading
was important.

“The majority of the other things that didn’t work were

judgments. It seemed that the better part of the whole thing
was rules. You can’t wake up in the morning and say, ‘I want
to have an intuition about a market.’ You’re going to have way
too many judgments,” said Dennis.

Fear and greed are the main driving forces behind trades.
Dennis and his turtle traders took emotion about out of an
investment. By just following the main rules and diminishing
emotional trading, turtle traders can possibly maximize
profits, according to Dennis.

“The market does not care how you feel. It will not prop up
your ego or console you when you are down. Therefore, trading
is not for everyone. If you are unwilling to face the truth
about the markets and the truth about your own limitations,
fears and failures, you will not succeed,” said Dennis.

Mind over matter in turtle trading

As Al from TradingSim noted in a previous article about
trading psychology, “analysis paralysis” can hurt turtle
traders. While it’s important to read financial articles from
sources like TradingSim, ultimately, a turtle trader has to
remove emotions from trading, especially when the market is
volatile as it currently is now. It’s important to know when
to exit a trade as a winner and when to cut losses.

Turtle traders have to learn to accept the risk that comes

with investing. Even if there is limited risk in trend
following, any loss can be emotionally devastating if
investors put a lot of money in a stock. Even though they are
following a trend, trends may change, especially with the
current volatility in the stock market. Staying calm,
especially during this volatile time, could be pivotal to
success in turtle trading.

What questions should turtle

investors ask?
Turtle investors may be mentally prepared to trade, but they
still have to conduct research. Turtle investors often had to
answer these questions every time they made a trade. If
investors want to be experienced turtle traders, they should
answer these pivotal questions.

1. What is the state of the market? The state of the market

is just the current state of stocks. If Apple(NYSE:AAPL)
is trading at $140, that is the current state of the
market.
2. What is the volatility of the market? Risk management
was important, so Dennis made sure his turtles monitored
the stock market each day. If Apple’s stock fluctuated
 between $130 and $140, then the turtles said they had 1
N or unit of volatility. So, Apple’s volatility, in this
case, would be 10 N.
3. What is the equity being traded? Turtle traders have to
know the exact amount of money being traded. If they
knew exactly how much they had, they could determine how
much they were risking with each trade.
4. What is the system or the trading orientation? In
addition to knowing the exact money turtle traders had
available, they also had to have an exact plan for
buying and selling stocks. That plan prevents traders
from buying or selling stocks out of pure emotion. If
Apple stock is tanking, a turtle trader won’t panic sell
if they stick to turtle trader rules.
5. What is the risk aversion of the trader or client? Risk
management was the name of the game of turtle trading.
If a turtle trader has $1,000 to invest, only 1% or 2%
should be invested in Apple stock. The minimal risk
enabled turtle traders to minimize their losses.

Turtle trading can pay off- but

only if risk is managed well
Trending stock turtle traders may monitor
Turtle trading may work now depending on a trader’s own
talent- and temperament. In a bull or bear market, there are
many factors that may affect turtle traders. They may have
more success if futures or commodities instead of more
volatile stocks. Successful trading depends on a trader’s own
trading education and psychology. Traders may have success
practicing simulated trading on TradingSim to determine for
themselves if turtle trading is right for them.

Even though Dennis may not have approved of financial

information, TradingSim probably would have been a trusted
research source for Dennis and his turtles. With simulated
trades on TradingSim, budding turtles can have the best risk
management of all with no-risk trades.

Whether turtle trading works now or not, it’s a legendary

system that will be studied for generations. Dennis noted that
training his turtles was easier and more rewarding than he
could have imagined.

“Trading was even more teachable than I imagined. In a strange

sort of way, it was almost humbling. ”