Turtle Trading: Rules, Statistics, and Backtests – Does It Still Work?

Last Updated on May 18, 2022 by Oddmund Groette

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The turtle trading technique is a trading approach named after Richard Dennis’ popular trading experiment in 1983. The experiment was to determine whether trading was an inborn skill or could be learned. The turtle trading experiment was a huge success, and the strategy employed by those traders was very successful all through the 1980s. But does it still work today?

Yes, the turtle trading strategy still works today. It is a trend-following strategy, so it works in markets with clear trends. While the original strategy, which is based on identifying breakouts, still works very well, traders have modified the rules by using technical indicators for trend identification. The technique may not be as profitable as in the 1980s, but traders can still use it to earn good returns.

In this post, we will discuss various essential things to know about turtle trading, including the rules, statistics, and backtests, under the following subheadings:

  • The turtle experiment
  • Who were the original turtles?
  • Turtle trading strategy: the complete rules
  • Which markets did they trade?
  • What is turtle theory? What is the logic behind Turtle Trading?
  • What happened to the original Turtles?
  • What happened to Richard Dennis?
  • What happened to William Eckhardt?
  • Turtle trading books

The Turtle experiment

Richard Dennis and his trading partner, William Eckhardt, conducted the turtle experiment to determine whether trading was an inborn skill or could be learned, following an argument they had. Dennis was of the opinion that anyone could be taught to trade the futures markets, but Eckhardt thought otherwise; he strongly believed that successful traders are born with a special talent that helps them to make massive gains from their trades.

To settle the debate between the duo, Dennis decided to conduct an experiment by recruiting and training some novice traders to ascertain the possibility of turning them into successful traders. This was the turtle experiment. They placed an advertisement and received applicants from aspirants to be trained. Fourteen successful applicants were trained for two weeks. During the training, Dennis referred to his students as Turtles as a reminder of the turtle farms he had visited in Singapore and decided that he could grow traders as quickly and efficiently as farm-grown turtles.

After the training, Dennis believed strongly that they would become successful traders if only they adhered strictly to instructions. He funded their trading accounts with amounts ranging from $500,000 to $ 2,000,000. In the end, many of those traders were successful, and Dennis was proven right that trading skills can be learned. Following the experiment, the strategy Dennis taught his students became very popular and has been known as the Turtle Trading Strategy.

Who were the original Turtles?

The original turtles were random fellows Dennis selected for his experiment. They were normal fellows with no special trading skills or prior training.

For his experiment, Dennis placed an advert in the Wall Street Journal to get the original turtles, and thousands of novice traders applied for the training. He then carried out some selection processes to screen the applicants. Although no one knows the exact criteria that Dennis used to select the original turtles, it is believed that several true and false questions were used to sort through the thousands of applicants. Eventually, 14 of the applicants were accepted as the original turtles.

These original turtles were specially taught how to use hard-and-fast Turtle trading rules. Dennis stressed the importance of adhering to instructions, assuring them they would become successful traders if they stuck to the instructions. According to Dennis, it’s one thing to understand a strategy and a different to implement the instructions.

Turtle trading strategy: the complete rules

The turtle trading strategy is essentially a trend-following strategy. The rules of the turtle trading system focused on these three key elements

  • Volatility-based position sizing methods
  • Pyramiding
  • Turtle trading exits and stops

Volatility-based position sizing methods

One important rule of the turtle trading strategy was to vary their position sizes based on market volatility. Dennis taught them to use the average true range to calculate volatility and use this to vary their position size. They were to take larger positions in less volatile markets and lower their exposure in highly volatile markets.

The goal was to maintain equivalent risk per dollar because higher volatility indicates higher risk. The turtles could diversify their portfolio by investing in similar risk levels. Dennis taught the turtles how to calculate risk using a set of calculations to limit how much danger they may take.

Pyramiding – Turtles added to winners

The turtle trading method also involved using the pyramiding technique to maximize profits on winning trades. That is, they added more positions when they are in a winning trade, using their floating profits to carry the extra positions. They did this systematically so that the profits from earlier positions can more than cover the new positions. If the market remains favorable, they bag a lot of profits with a much bigger position.

The key to pyramiding success is to keep your risk-to-reward ratio low, which means you should never risk more than half of what you stand to gain or your reward. A winning trade can compound your profit if done correctly. However, recognizing which trades are ideal for pyramiding needs a lot of skill and insight.

Like other speculative activities, pyramiding employs leverage to increase the size of a stake. It is dangerous and can result in amplified gains or losses. While some hedge funds and private investors use this strategy, many do not have the resources. Furthermore, most hedge funds avoid taking such a high risk in a single trade. If you try to use pyramiding, you must be correct, or else the strength of leveraging will work against you.

Only employ pyramiding when the market is trending strongly, and make sure you have an exit strategy before you start trading. Resist the need to grow greedy and stick to your risk-mitigation strategy, always keeping the optimum risk-to-reward ratio in mind.

Turtle trading exits and stops

The third important rule of the Turtle Trading strategy is the use of stop loss orders. The turtles were taught to determine ahead of time when to cut losses and move on and were mandated to always exit once the market reaches their predetermined stop price.

For a winning trade, the turtles were taught to exit when a breakout occurs in the opposite direction of their position. They understand that holding a few lost positions for an extended time eventually wipes out the profits from other trades, resulting in disaster. So, they have specific criteria for exiting a winning position.

Which markets did they trade?

The Turtles began by trading over two dozen instruments, including US bonds of various maturities, cotton, sugar, gold, coffee, crude oil, heating oil, gasoline, S& P 500 futures, silver, and a few currencies such as the Swiss Franc, French Franc, Deutschmark, British Pound, Eurodollar, and Japanese Yen. Some of these have been replaced by the Euro, such as the French Franc and the Deutschmark, so a modern basket would look a little different. The main issue with this setup is the number of funds required to trade many units.

What is turtle theory? What is the logic behind Turtle Trading?

The turtle theory is based on the fact that the market can stay in a trend for a prolonged period. In the market, it is believed that the trend, once established, remains until it is proven to have reversed. So, the logic behind the strategy is to identify the emergence of a new trend early, trade in the direction of the new trend, add more positions as the trend progresses, and finally exit from the trade once a new trend seems to emerge in the opposite direction.

To identify the emergence of a new uptrend, Dennis uses the breakout strategy. Specifically, the turtles used the breakout of a 20-day high to identify the beginning of a new uptrend and then enter a long position. Subsequent breakouts, such as the breakout of the 55-day high, were seen as opportunities to add more positions (pyramiding).

The trend is believed to have reversed if a breakdown of the 20-day low occurs. When that happens, they exit their positions or even look to go short and profit from the emerging downtrend. They aim to stay in the short position until another breakout of the 20-day high occurs.

So, the strategy is all about following the trend and using the breakout of the 20-day high or low to identify emerging trends. Other aspects of the strategy were just managing position sizing and risks.

What happened to the original Turtles?

Those turtles who followed the rules were the ones who survived the experiment. Unfortunately, not all of the turtles survived. After struggling to follow the rules Dennis had taught his turtles, some were asked to leave the experiment.

The most difficult aspect of following the rules for most turtles was the exit strategy, which required them to wait for a new low. This entailed watching as 20%, 50%, or even 100% of profits vanished. One turtle was released before the end of the first year because he did not follow the rules for the exit strategy.

Those who followed the rules and stayed in the experiment made large profits by basing their trades on the Turtle Trader rules. Many of them became very successful and went on to establish their own trading firms.

However, not every turtle was successful. One of the turtles, Curtis Faith, established his money management firm. It failed spectacularly, but it’s unclear how well Faith followed the Turtle Trader rules. On the other hand, Chesapeake Capital is still managed by Jerry Parker.

What happened to Richard Dennis?

What happened to Richard Dennis is an intriguing side note to the story of the Turtle Trading experiment. Dennis made his first million dollars before the age of 25. At the height of his trading success, he was dubbed the “Prince of the Pit.” Dennis made $80 million in 1986 alone. During this time, Dennis’s name was added to those of other industry titans such as George Soros and Michael Milken. But his success did not last.

Dennis’ strategy was always fraught with risk. On some days, Dennis could be millions of dollars in debt, but he believed the wins outweighed the losses. For a long time, they did. But there came a time when this was no longer the case. Dennis lost more than half of his assets between 1987 and 1988 when his turtles completed their five-year experiment. It’s debatable whether Dennis strictly adhered to his Turtle Trading system when he lost this money. Dennis stopped trading as a result of this loss. His name is now remembered far more for his Turtle Trading experiment than for his successful trading career.

What happened to William Eckhardt?

William Eckhardt became famous with the turtle trading experiment. He was Dennis’ trading partner, and they both worked on the experiment. While the experiment’s details have become legendary, its worth can be seen in the many highly successful trading firms it led to, as evidenced by our Top Traders of 2010.

By 1993, Eckhardt was ready to declare the experiment over and himself incorrect. Eckhardt admitted in an interview for Jack Schwager’s compelling book The New Market Wizards: “I assumed a trader added something that couldn’t be encapsulated in a mechanical program. I was proven wrong. The turtle program was a huge success,” he said.

Meanwhile, Eckhardt founded his commodity trading advisor (CTA) in 1991, and it has produced a compound annual return of 17.35 percent over the last 20 years, with a profit of 21.09 percent in 2010. In addition to developing trading systems, Eckhardt has created a trading science and written academic papers on the philosophy of science.

Turtle trading books

Many books and articles have been written about the turtle trading experiment and system. But one of the most popular ones is “The Complete TurtleTrader: How 23 Novice Investors Became Overnight Millionaires”. It was written by Michael W Covel and featured the true story behind Wall Street legend Richard Dennis, his disciples, the Turtles, and the trading techniques that made them millionaires.

 

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