Turtle Traders – History, Strategy & Do Their Rules Still Work in Current Markets?

Have you ever wondered who were Turtle Traders and what are Turtle Traders’ rules? If yes, then you are not alone. Everyone in the world of trading and investing wants to know about Turtle Traders, Turtle Experiment, Turtle Trader rules, history, and everything else about them.

But the question is “Why do people want to know about Turtle Traders?” The reason is that there is an element of motivation there. If some newbies with zero knowledge about trading can gain success, then why wouldn’t you? The only thing is whether you are following the right approach or not. Let’s dive deep to know all about Turtle Traders.

History

The history of Turtle Traders is very interesting. It gives you the answer to a very good question. Have you ever thought about the NATURE VS. NURTURE phenomenon in trading? In other words, do successful traders have innate trading talent and skills? Or did they acquire it over the course of their practical trading? 

Some people think that successful traders are born with excellent trading skills. They have natural trading skills. Conversely, there are some who think that there is no such thing as natural trading talent. Everyone can become a trader according to them and develop trading skills through the right knowledge and experience. And this debate was what led to the famous TURTLE EXPERIMENT. 

Richard Dennis and Bill Eckhardt 

Richard Dennis and Bill Eckhardt were two commodity traders – highly successful and experienced. Those two gentlemen formulated Turtle Traders rules in 1983. 

Richard Dennis VS. Bill Eckhardt

Richard Dennis and Bill Eckhardt had opposite thoughts about the successful trader. Anyone can become a successful trader according to Richard Dennis. He believed that even a novice can be trained and become a successful trader. However, Dennis believed that following the right approach and rules with discipline is the key to profitable trading. 

Contrarily, Bill Eckhardt believed in NATURE THEORY. He believed that successful traders are born not trained. Bill thought that a trader only became successful if he/she was born with exceptional skills. That means he believed in the NATURE theory – people with natural trading skills become millionaire traders. 

If we dig a little deeper, Richard Dennis was a highly successful trader, during the 1980s. He started his trading journey with a few bucks and turned them into millions. Eckhardt had the belief that Dennis’ remarkable success was because of his innate inborn skills. Dennis disagreed because he knew there were particular trading rules behind his own success. He emphasized anyone could achieve success in trading by following his rules.

That was a very serious difference in opinion. Therefore, Dennis planned on settling the dispute. He came up with a suggestion and proposed to recruit and train novices that would eventually settle Nature VS. Nurture debate.

The Turtle Experiment

Richard Dennis and William Eckhardt started the Turtle Experiment. The purpose was to choose novices and train them. Teaching them a WINNING trading system was part of the experiment. Now, let me tell you why they named the experiment the Turtle Experiment. 

Comparing the apprentices’ development to TURTLES in the turtle-breeding farm in Singapore was also part of the entire plan. That is why the experiment was named the Turtle Experiment. Now was the time to assign traders capital for trading. Dennis was so confident in his rules that he himself provided traders capital to trade. He was absolutely right.

How did Dennis choose turtles for the Experiment?

Dennis did not describe the exact criteria for how he chose traders for the experiment. There were thousands of applicants and he chose only a handful of turtles. Although it is reported that he asked sixty three true or false questions, no one knows whether these questions were the only screening process or there were other criteria as well.

Now the question is, whether Dennis picked ordinary persons off the street or not. This is highly unlikely because even common sense doesn’t accept that. How would someone pick novices and turn them into expert traders in just 14 days? Moreover, novices would not be able to answer his questions. This all suggests that those people knew about trading even though they were not famous traders. We can also surmise that most of the turtles if not all knew about Dennis. That is why they desired to train with him and learn about his trading rules. So, we can safely say that turtles were not novices whom Dennis picked randomly off the street.

However, one thing is crystal clear. Dennis was absolutely right about his nurture theory. He was also confident about his trading rules and that’s why the famous Turtle Traders experiment was successful.

The Scientific Method as the Foundation for the Turtle Trading rules

Dennis taught his chosen people the Turtle Trading rules and his trading philosophy. The training had a very significant effect on trainees. They learned that scientific method is the key to successful trading. They also realized how a scientific approach would lay the foundation for successful trading. Why so? Because relying on analyzable and measurable numerical data is the foundation for  the scientific method. The scientific method consists of the following key steps:

1. Define the problem
2. Collect information
3. Develop a hypothesis
4. Conduct an experiment to prove the hypothesis and gather data
5. Analyze that acquired data
6. Interpret the data

Now, the rule is simple here. If the data meets the hypothesis, that means you were right and vice versa. 

Dennis knew that the scientific method is the technique to reduce the effects of emotions on trading. He also knew that such psychological impacts lead traders to mistakes and significant loss of money. Therefore, he taught his disciples the scientific method.

The Turtle Trader Rules – Basic concepts and questions

Dennis believed that his trading success was because of his trading rules. He also believed that anyone could gain success in trading by following those rules. However, Dennis also wanted turtles to learn some basic core concepts and a few questions. That said, he made turtles understand those concepts along with the scientific method. These Turtle Trading concepts were:

• “Do not let emotions fluctuate with the up and down of your capital.” 
• “Be consistent and even-tempered.” 
• “Judge yourself not by the outcome but by your process.” 
• “Know what you are going to do when the market does what it will do.”
• “Every now and then, the impossible can and will happen.” 
• “Know each day what your plan and your contingencies are for the next day.”
• “What can I win, and what can I lose? What are the probabilities of either happening?”

Wait – these aren’t concrete concepts. Even if they are, they do not provide complete guidance. Yes, this is what Dennis knew. Therefore, he also gave his disciples five questions. These five questions were more than enough to achieve success in trading. Dennis asked turtles to always have an answer to these five questions. The five questions were;

1. What is the state of the market? 
2. What is the volatility of the market? 
3. What is the equity being traded? 
4. What is the system or the trading orientation? 
5. What is the risk aversion of the trader or client?

The Turtle Trading Rules

“What is the state of the market?” was the first question Dennis wanted his turtles to find an answer to. That means he wanted them to trade in the present instead of thinking about the past or the future. In other words, Dennis trained them to be trend-following traders. Secondly, he also made turtles understand certain trading rules. The Turtle Trading rules include;

Position sizing

Position sizing refers to how much amount a trader is willing to put at risk. Traders decide position size by analyzing the dollar volatility of a given market. The simple rule is that the more volatility, the higher the risk. Therefore, Dennis developed a rule – to find investment opportunities with a similar risk per dollar invested. The objective was to diversify a portfolio and invest in assets with a similar risk per dollar invested. Dennis also wanted turtles to take the limited risk. Therefore, he taught them certain formulas to quantify risk.

Stops

Dennis was an expert at trading and therefore, stops were a very crucial part of his trading system. He taught turtles to get out of a wrong trade earlier rather than later and cut losses as short as possible. Of course, the objective was to save capital and move on to the next trade. This Turtle Trading rule made turtles fearless. They used to accept loss earlier instead of hanging on and increasing loss.

The Results

Now that we know the turtles’ rules, the question becomes – how successful were they? The answer – is very successful.

The experiment lasted for five years. Once these five years were up, the turtles had made a combined profit of $175 million. Not all traders made it to the end, and due to the highly volatile nature of the Turtle Trading system, there were also plenty of losses among the turtles. Still, ultimately, Dennis proved himself correct in believing that anyone can be taught how to trade successfully.

The Turtle Trader Rules and the Systems

As you already know, Dennis was a trader who always followed trends in trading. He used to base his trades on price channel breakouts. Basically, his strategy had two systems referred to as S1 and S2. He used both systems for trading liquid futures. Let’s have a look at them.

System 1 (S1)

The short-term but more aggressive of the two trading systems was System 1. It required traders to buy a security when the current price went beyond the high price of the previous 20 days. This strategy was for a long position. Conversely, the system required traders to buy a security when the current price went below the high price of the previous 20 days. This strategy was for a short position. Moreover, for long positions, a ten-day low was the signal to exit in this system. Contrarily, for short positions, a ten-day high was the signal to exit.

System 2 (S2)

On the other hand, System 2 was all about a slightly longer approach. However, it was not a long-term strategy. Moreover, System 2 was less risky as compared to System 1. It required traders to buy a security when the current price went beyond the high price of the previous 55 days. This strategy was for a long position. Conversely, the system required traders to buy a security when the current price went below the high price of the previous 55 days. This strategy was for a short position. Moreover, for long positions, a twenty-day low was the signal to exit in this system. Contrarily, for short positions, a twenty-day high was the signal to exit.

The purpose of System 1 and System 2

As you know, Dennis himself was a trend follower, his trading rules were also based on trends. However, identifying trends earlier is a tough task and he knew that. Therefore, he introduced these systems. There are enter and exit signals in these systems. Enter signals were used to alert turtles whenever there was a trend in the making.

Similarly, entering a trade isn’t the only thing of importance in trading. Traders also need to know when to exit a trade if things aren’t going their way. As you know, human emotions like fear and greed often lead traders to poor exits. Again, Dennis knew it all. Therefore, he also gave exit plans in both systems. The exit Turtle Trading rules were also simple. If the trade would go according to plan, Turtles would stay in the trade. Conversely, if trade would not go according to plan, Turtles would have to exit the trade.

Richard Dennis after the Turtle Experiment

“What happened to Richard Dennis after the Turtle Experiment?” Isn’t it a very interesting footnote to the story of the Turtle Trading experiment? Dennis was a highly successful and millionaire trader during his early twenties. He was known as the “PRINCE OF THE PIT.” It is quite astonishing to know that Dennis made $80 million in 1986 alone. So, we can say that his name was booked in the list of the elite traders of the 1980s. Unfortunately, his success was for a short period of time.

What was the reason for his downfall? The reason for his downfall was his high volatility strategies. Dennis used to lose millions in a single day. However, he believed that winning trades always outweigh losing trades. This was true but it didn’t last for long. He lost almost half of his assets between 1987 and 1988. Why did it happen? Did Dennis stop following his strategies? Or, were there other reasons? This is a matter of debate. 

Eventually, Dennis retired from trading after incurring significant losses. People now remember him not as an extraordinary trader but for his Turtle Experiment. So, this was the story of Richard Dennis. But what happened to his turtles? Did they go on to become successful traders?

The Turtle Traders after the Turtle Experiment

The turtles who passed the test were only those who strictly followed the Turtle Trader rules. Dennis asked several of them to leave after watching them struggling to follow his rules. So, not all of the original turtles managed to make it through the experiment.

Following the exit strategy was the most difficult part for most turtles. They didn’t have the patience to wait for a new low. They could not watch their profit disappear. It is also reported in history that one turtle was asked to leave at the end of the very first year. Why so? Because he failed to follow the exit strategy.

Moreover, not much is known about turtle traders. In fact, we don’t know about most of them. However, there were a few who made remarkable success. For example, Jerry Parker started his own firm named Chesapeake Capital. He still manages his firm. Similarly, Curtis Faith also started “Acceleration Capital”. However, his management firm did not taste success for long and ended in a rather dramatic fashion.

Are Turtle Trader rules still working?

Dennis introduced the Turtle Trader rules during the 1980s, almost 40 years ago. Everything has changed since. In fact, the way people used to trade has revolutionized. That said, it is almost impossible to trade with a few fixed parameters. Additionally, financial markets are choppier nowadays and therefore, demand more careful entry and exit. Moreover, data and information also play a key role in successful trading. That said, it is safe to say that the Turtle Trader rules are no longer applicable in modern-day trading. 

The Bottom Line

The Turtle Trading story began with a Nature vs. Nurture debate between two traders Richard Dennis and Bill Eckhardt. Bill believed that people with natural inborn trading skills become successful traders. Conversely, Dennis had opposite views. He believed in nurture theory and used to say anyone could become a trader by following some rules and systems. Dennis was right and he proved himself right by conducting the Turtle Experiment.  

Dennis picked a few people and trained them to become successful traders. Many of them failed along the way and a few went on to become successful traders. Whether or not Turtle Trader rules are applicable now, his tale and experiment are fascinating. Moreover, one aspect is still applicable and that is keeping emotions at bay when trading.