Turtle Traders: the Experiment, the Rules and Whether They Still Work

The Turtle Traders were a group of trainees recruited in 1983 by the Chicago commodity trader Richard Dennis and his partner William Eckhardt to settle a bet: can great traders be made, or are they born? WBEZ reports that they took around 20 people, about half with no business background, and trained them for two weeks. Their rules, later published free by one of the original Turtles, are a complete trend following system: breakout entries, volatility based position size, fixed stops and exits.

This page covers the experiment, the rules as written in that document, and an honest answer to the question every trader asks: do they still work?

The experiment

According to the Original Turtles site, Dennis and Eckhardt had an ongoing dispute in mid-1983 about whether great traders were born or made. They ran an ad for trading apprentices in Barron's, the Wall Street Journal and the New York Times, trained the recruits in Chicago for two weeks at the end of December 1983, let them trade small accounts in January, and funded most of them with $1 million in February. The name came from Dennis, who said, as the Wall Street Journal quoted him in 1989: "We are going to grow traders just like they grow turtles in Singapore."

The same site states that over the next four years the Turtles "earned an aggregate sum of over $100 million dollars". That figure comes from the Turtles' own site and is not an audited track record. Not all of them made money: WBEZ notes that several were dropped early in the program.

Position size: the Unit

The Turtles measured volatility with N, a 20-day exponential moving average of the true range, close to what is now called the average true range. They then built positions in pieces called Units, sized so that a move of 1 N equals 1% of account equity. This is volatility based position sizing: a quiet market gets more contracts, a wild one fewer.

The document's own example uses heating oil with N = 0.0141 and 42,000 dollars per point: on a $1,000,000 account the Unit is 16.88 contracts, truncated to 16. On a $100,000 account the same market gives 1.688, truncated to a single contract, which is why the document warns that small accounts lose most of the benefit of the adjustment.

Limits and drawdown rules

The rules explain why the limits exist. On the day after the October 1987 crash, the Turtles were loaded long in interest rate futures, and "in some cases, 20% to 40% of account equity was lost in a single day". The document adds that these losses would have been higher without the limits.

A second rule cut size during drawdowns: the notional account was reduced by 20% for each 10% loss of the original account. In the document's example, a $1,000,000 account down $100,000 is traded as if it were $800,000; after a further loss of $80,000, as if it were $640,000. The real equity is then $820,000, so the cut is deeper than the loss: each Unit is sized on an account 22% smaller than the one the trader actually has.

Entries: two breakout systems

Both systems are channel breakouts in the tradition of Richard Donchian, the same idea as the Donchian channel. A losing breakout, for the System 1 filter, was one where price moved 2 N against the position before a profitable 10-day exit. The document insists on consistency, because "most of the profits in a given year might come from only two or three large winning trades".

Adding Units and moving stops

The Turtles added one Unit for every ½ N move in their favor, up to the limits, and set the stop at 2 N from the entry, so that no trade risked more than 2% of equity. Each time a Unit was added, the stops of the earlier Units were raised by ½ N. This is the document's crude oil example, with N = 1.20 and a 55-day breakout at 28.30.

The stop always sits 2 N, or 2.40, below the last entry. With four Units on, the first Unit's stop at 27.70 is only 0.60 below its own entry. The rules also say that stops were not always placed with the broker, to avoid revealing large positions, but every exit was taken without exception.

Do the Turtle rules still work?

We have not run our own test of these rules, so we do not publish a return figure. What the sources say is more nuanced than a yes or no. The Original Turtles site notes that few Turtles kept trading the original rules unchanged, and that the changes they described were mostly in money management rather than entries. It also points to a later interview in which Dennis describes the Turtle System as his old, discarded system. WBEZ reported in 2013 that one of the recruits was still trading with his own firm.

The fair reading: the rules are a complete, public example of trend following, not a secret edge. Their parts, a volatility based Unit, hard stops, position limits and a size cut in drawdowns, are useful to any trend trader even if the exact breakout lengths are not. Compare with Ed Seykota and other careers in the famous traders section.