The Turtle Trading Experiment: What We Can Learn From It

by FX EA Review
The Turtle Trading Experiment: What We Can Learn From It

If you know anything about reptiles, you’d appreciate that turtles are indeed fascinating creatures. Turtles are present the world over in a multitude of climates, can live up to 250 years, and the largest of these animals has been found to weigh above 1000 pounds.

Turtles belong to the Testudines family, which includes tortoises. The latter animal is exemplified in the legendary Aesop fable, ‘The Tortoise And The Hare.’ The story has continually been epitomized as a moral lesson between moving carelessly and taking things slowly.

Ultimately, the tortoise tends to win the race. Fast forward to 1983, and two legendary commodity traders, Richard Dennis and William Eckhardt, came up with the Turtle Trading experiment. 

The study wasn’t only about reinforcing patience but discovering whether traders were born or made. Could you teach someone how to trade, or was it genetics, nurture, or nature? 

Moreover, the experiment introduced the now popular trend-following turtle trading strategy, becoming one of the most well-known studies in the financial markets. So, let’s explore the finer details of this test and the several teachings we can derive from it.

Inspiration for the experiment

The ‘Prince of the Pit’ was once the nickname in the 70s and 80s for the legendary commodities trader, Richard Dennis. Widely regarded as one of the greatest in the financial markets, the now 72-year old American reportedly loaned out $1600 back in the day, which he turned to about $350 million in six years.

His younger partner at the time, William Eckhardt (another esteemed commodities/futures speculator), discussed their success numerous times. However, the pair had opposing views on what led to it. 

Dennis believed the art and skill of trading were transferable to anyone through a set of simple rules, while Eckhardt argued it was an innate gift. To settle the debate, Dennis wanted to put his money where his mouth was with an experiment involving his real funds. 

He aimed to recruit many students, which he named ‘turtles,’ in reference to the turtle farms he saw in Singapore.

Dennis believed he could nurture traders just as farmers do to turtles and teach them which markets to trade, tactics revolving around strict position sizing, entries/exits, profit-taking, and stop losses.

Recruiting the ‘turtles’

In an old-school fashion reminiscent of the time, the Americans ran ads in The Wall Street Journal, Barron’s, and The New York Times to enlist the ‘turtles’ or ‘trading apprentices.’

They obtained more than a thousand applications but culled this large group into about 10 participants. These ‘turtles’ were welcomed to Chicago for two weeks of training in much of what would become the famous turtle trading strategy. 

Last but not least, they were offered real money-funded accounts (reportedly $1 million each) to implement the teachings and system.

Rules of the experiment

Futures, commodities, forex, energy, bonds, metals, and the S&P 500 were the instruments allocated for the participants to trade with the system. Strategy-wise, this involved a straightforward trend-following methodology where one buys and sells breakouts (20-day Moving Averages) inside defined trading ranges. 

It isn’t clear what the exact parameters were, to the point where most of this information is even guarded by copyright. However, some of the specific rules are covered in the 2007 book, ‘The Complete Turtle Trader: The Legend, The Lessons,’ by Michael Covel:

  • Utilize the ATR (Average True Range) indicator gauge volatility, using this tool as a basis for position sizing. The ‘turtles’ were instructed to take bigger positions in less volatile markets and smaller positions in more volatile ones.
  • Don’t risk above 2% of your equity on any given trade.
  • One needs to accept the possibility of large drawdowns for significant returns.
  • Observe price action instead of information from the media to make trading decisions.
  • Have a defined plan for your entries and exits; know where and when to take profits and cut losses (including always using a stop loss). The students were taught another entry system for winning positions where they were told to add up to four additional entries.

The experiment’s final outcome

The study ran for five years, with the prosperous students generating a combined $175 million profit in the process. Sadly, not all the students followed the rules to the tee, meaning their performance wasn’t as stellar as the successful ones. 

Understandably so, the turtle trading strategy is prone to large drawdowns. Nonetheless, Dennis certainly had the last laugh in proving anyone is teachable in trading profitably.

Final word: the main teachings to derive from the Turtle Trading experiment

There undoubtedly is a wealth of lessons to receive from this acclaimed experiment. Below are the main takeaways:

  • One of the running themes with this experiment is patience, as Dennis judged the performance of the participants over several years instead of a few months. 

This is important for any online trader as results in the long term are harder to achieve but are more sustainable and truly indicative of someone’s skill.

  • ‘Turtle trading’ is a strategy still used today in various financial instruments, taking advantage of trending markets. The trend has been a bread-and-butter concept in trading for decades, and strategies based around it are the simplest to profit from and implement.
  • Of course, the turtle trading strategy is not the ‘holy grail’ and has been criticized by many. Most analysts believe the sample size of participants was too small to accurately judge the system’s success, causing somewhat disproportionate results.

Also, trend-following strategies are prone to drawdown where it’s difficult for traders to determine when markets have changed to range-bound conditions. 

  • Ultimately, the point of the experiment was to settle the debate between Dennis and Eckhardt. There is some gut feeling involved in being a profitable trader, though the majority of one’s success boils down to following a mechanical set of rules.

Effectively, Dennis wanted to prove anyone with little or no trading experience could learn to trade successfully. He concluded great traders were made and not born.

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