Ever wondered if trading success could be taught? “The Complete TurtleTrader” by Michael W. Covel delves into the fascinating true story of the “Turtle Traders,” a group of novices Richard Dennis famously trained to become profitable traders in just a few weeks.

This book isn’t just a captivating narrative; it’s a treasure trove of practical trading wisdom that continues to resonate with traders of all levels.

The Experiment and Its Premise:

The core of the Turtle experiment was Dennis’s belief that successful trading could be taught through a defined set of rules. He famously made a bet with his partner William Eckhardt, who believed trading was an innate talent. To settle this debate, Dennis advertised for and selected a diverse group of individuals with little to no trading experience – the “Turtles.” He then provided them with a specific, rule-based trading system and capital to trade. The results were astonishing, with many Turtles achieving significant profits.

Key Principles and Rules of the Turtle System:

Covel meticulously breaks down the core components of the Turtle Trading system, offering valuable insights into their methodology. Here are some of the crucial elements:

• Trend Following: The Turtle system was fundamentally a trend-following strategy. They aimed to identify and capitalize on established trends in various markets. They believed that prices move in trends and that by following these trends, profits could be made.

• Systematic Entry Rules: The Turtles operated with very precise rules for entering trades based on breakouts:
  • Short-Term System (Shorter-Term Breakout): Buying when the price exceeded the high of the previous 20 days or selling when the price fell below the low of the previous 20 days. This aimed to capture shorter-term trends.
  • Long-Term System (Longer-Term Breakout): Buying when the price exceeded the high of the previous 55 days or selling when the price fell below the low of the previous 55 days. This aimed to capture more significant, longer-lasting trends.

• Precise Exit Strategies: The Turtles had defined rules for exiting both losing and winning trades:
  • Short-Term System (S1 Exit): A losing trade was typically exited when the price moved against the initial entry and hit a stop-loss level. Winning trades in the short-term system could be exited when the price fell below the 10-day Exponential Moving Average (EMA).
  • Long-Term System: Losing trades were stopped out based on volatility (as explained in position sizing). Winning trades could be exited when the price fell below the 20-day EMA or when a predetermined multiple of “N” (the 20-day Average True Range) moved against the position from its highest point, helping to secure substantial profits.

• Sophisticated Position Sizing: Risk management was paramount. The Turtles used a systematic approach to determine the number of units (contracts or shares) to trade:
  1. Account Risk: They typically risked a small, fixed percentage of their total account equity per trade (e.g., 2%). For a $100,000 account, this would be $2,000.
  2. Volatility Measure (“N”): They used the 20-day Average True Range (ATR) as a measure of market volatility. “N” represented the average daily price fluctuation.
  3. Dollar Risk per Unit: This was calculated by multiplying “N” by the dollar value of a single contract or share in that market. For example, if corn futures had an “N” of 7 cents and each contract represented 5,000 bushels, the dollar risk per contract was $350 (7 cents x $50).
  4. Calculating Unit Size: The number of contracts or shares to trade was determined by dividing the total account risk per trade by the dollar risk per unit for that specific market. For the $100,000 account risking $2,000 on corn with a $350 risk per contract, the initial position size would be $2,000 / $350 = 5.71 contracts, rounded down to 5 contracts. The key was to make a “unit” of risk roughly equal across all the diverse markets they traded, allowing them to treat markets as “numbers” without needing fundamental expertise in each.

• Pyramiding into Winning Trades: Eckhardt taught the Turtles to aggressively add to profitable positions to maximize gains:
  1. Initial Entry: A position was initiated on a valid breakout signal.
  2. Adding Units: Additional units were added as the market moved favorably, typically at intervals of 1/2 “N” above the entry price for long positions (or below for short positions). For example, if a market was bought at 100 with an “N” of 5, the next unit could be added at 102.5, then 105, and so on.
  3. Maximum Units: There was a limit to the number of units that could be pyramided into a single position, often around 4 or 5 units in total.
  4. Stop-Loss Management During Pyramiding: The initial stop-loss for the first unit was often placed at 2 “N” away from the entry price. As subsequent units were added, the stop-loss orders for all units in the position were progressively raised to the stop-loss level associated with the newest unit (also typically 2 “N” away from its entry price). This “trailing stop” mechanism protected profits as the trade moved in their favor.

• Discipline and Consistency: The most crucial aspect was the unwavering commitment to following the rules precisely, without letting emotions or intuition interfere.

Lessons Learned and Enduring Relevance:

“The Complete TurtleTrader” offers valuable lessons that extend beyond the specific rules of the Turtle system:

• Trading is a Skill That Can Be Learned: The success of the Turtles definitively demonstrated that with a well-defined system and proper training, individuals without prior experience can become profitable traders.
• The Importance of a Rules-Based Approach: The book underscores the critical role of having a clear and objective trading plan and sticking to it. This helps to eliminate emotional biases that can lead to poor decisions.
• Risk Management is Paramount: The Turtles’ meticulous approach to position sizing and stop-losses highlights the absolute necessity of managing risk effectively to protect trading capital.
• Trend Following Can Be Profitable: Despite the evolution of markets, the core principles of trend following remain relevant. Identifying and riding trends, and knowing when to exit, can be a powerful strategy.
• Discipline and Patience are Key: Successful trading requires the discipline to follow the rules consistently and the patience to wait for trading opportunities to materialize.

Who Should Read This Book?

“The Complete TurtleTrader” is a must-read for:

• Aspiring Traders: It provides a real-world example of how a systematic trading approach, including detailed rules for entry, exit, and position sizing, can lead to success.
• Experienced Traders: It offers valuable insights into risk management, position sizing techniques like volatility-based units, pyramiding strategies, and the critical psychology of trading.
• Anyone Interested in Market History: The story of the Turtle experiment is a fascinating chapter in trading lore, showcasing a unique approach to training and market participation.

In Conclusion:

“The Complete TurtleTrader” is more than just a retelling of a famous trading experiment. It’s a practical guide to developing a systematic and disciplined approach to trading, emphasizing the crucial roles of risk management through precise position sizing, maximizing profits through pyramiding, and adhering to clear entry and exit rules. While the exact Turtle rules might need adaptation for today’s markets, the underlying principles of trend following, volatility-adjusted risk management, and disciplined execution remain timeless and essential for achieving long-term trading success.

Thank You for reading , Follow me at Surajit Bhowmik (Founder ,kinginvestment.in, NISM Certified Equity Research Analyst , Investing since 2017)

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