By Larry Wright
Introduction
Over the years, many investors and traders have developed simple and effective trading methods. Turtle trading is one such method that started as part of an experiment. Reading about Turtle Trading investors who are just getting started with investment and gaining financial literacy can improve their skills and increase their profit generation potential. This article is going to explain how Turtle works and how anyone can learn it with a little training.
What is Turtle Trading?
Trading is the act of using money that has been preserved as savings to generate more profits. However, the majority of the population still prefers to make a living based on their monthly salary or owning a business.
The main reason that most people don’t take up trading is that it can feel like a gamble. A person without any formal training in the financial markets and who does not have any insight into the world economy can be at a huge disadvantage when playing with stocks.
It is important to note that even the people who have professional training and years of experience in trading are not free from the risk of losing all their capital. Therefore, most people prefer to stay away from trading and rely on the safety of consistent paychecks.
However, everyone knows that inflation keeps increasing as time moves forward. Therefore, the money that is present as savings today is not going to be enough in the future for performing a certain task.
Turtle Trading started keeping in view all the above trading questions and theories. Turtle trading is a technique that allows investors to take advantage of predetermined and solid trading techniques. This type of trading technique is all about following rules and eliminating the risk of losses by discarding the interference of emotional or irrational decision-making.
The participants of Turtle Trading are called Turtles. These turtles are expected to follow the specified set of rules and search for breakout positions in the market either positive or negative.
The Turtle Trading Experiment
Turtle trading techniques were pioneered by Richard Dennis in the 1980s. He started his investment career as a stock market runner and opened his first account with only $40.
However, he was able to raise as much as $100K eventually and cemented his position in the trading world as a successful investor. Dennis met a Mathematics Ph.D. and trading academic named Willam Eckhardt and got into a philosophical disagreement with him.
Dennis believed that trading is a teachable skill and that anyone with enough resources can learn it. His friend Eckhardt disagreed with his ideas.
To settle their disagreement, Dennis set up a trading experiment and named it Turtle Trading. He had recently visited the Turtle farms during his visit to Singapore and exclaimed that he can grow traders just like turtles. To start the experiment he published an advertisement in all major news outlets of the time namely the Wall Street Journal, The International Herald, and Barron’s.
Around 1000 candidates answered the advert and Dennis selected candidates hailing from diversified backgrounds such as pilots, computer programmers, and pianists among others.
However, none of these candidates had any prior trading experience. Dennis selected his turtles and enrolled them in a 2-week trading training program. At the end of the program, he provided $50K of his own money to open trading accounts for his turtles.
Based on the performance of the turtles he would increase or decrease their seed capital. At the end of the program, Dennis provided around $1 million to $30 thousand to each turtle.
As per an article in the Wall Street Journal, turtles reported an average annual return of 80%. In comparison, the professional brokers from Barclays and S&P Index only had smaller annual percentage income. Dennis and Eckhardt kept 85% of the profits while turtles were allowed to keep 15%.
During the training session, Dennis and Eckhardt taught the turtles to locate the best breakout periods in the market. Another important aspect of turtle trading was sticking to the defined rules of trading for entering or exiting positions regardless of any news, gut feelings, or market changes.
How does Turtle Trading Work?
Turtle Trading is based on the theory of whether trading is teachable or is it an inherent quality. The results of Turtle trading proved that anyone can learn trading with proper training and guidance.
Talking about the Turtle Trading program, Dennis once claimed that even when he was in favor of the idea that trading is teachable he never expected it to be so successful. When thinking about Turtle Trading, investors should keep in mind that it requires following and understanding a very specific, well-defined, and technical set of rules.
There is no room for intuitive trading in the Turtle Trading program. Turtles are not allowed to change their decision at any point based on news or the latest market development. Turtles are required to adhere to their trading techniques strictly even if some trades do not pay off.
The idea behind Turtle Trading is that given a massive frequency of traders, a Turtle is going to end up with profits despite a few losses in passing. Turtle Jerry Parker, who is the head of Chesapeake Capital founded over 30 years ago claims that turtles who are unable to follow the rules are asked to leave.
He reportedly manages his financial firm based on the same principles learned from Dennis in the 80s. Another turtle named Russel Sands who passed away in 2019, once told media that the Turtle Trading program remained operational for five years. He also claimed that turtles were able to generate around $175 million in profits.
Richard Dennis is currently working as the president of Dennis Trading Group Inc. and he does not train turtles anymore. However, the rules that he pioneered as part of the Turtle Trading experiment are still followed by investors around the world with suitable modifications.
Key Elements of Turtle Trading
Turtle Trading stresses that traders always stick to trading decisions based on technical market analysis. However, there is also a defined set of rules that every turtle should follow.
All of these rules do not leave room for any confusion and define the next trading step loud and clear. Here are all the founding principles of Turtle Trading that every investor in this program needs to adhere to:
Entry Points
The Entry point strategy for turtle traders is always defined and specified. The entry position for turtle trading is created by identifying a visible breakout period in the marketplace. The period is identified based on technical analysis.
Over the years, entry position rules for turtle trading have evolved and become more refined. However, the most basic type of entry position can be divided into two options namely S1 and S2.
S1 is a 20-day breakout period also known as a short-term trading system. Meanwhile, the S2 is a long-term system that looks back around 55 days. A breakout period refers to the measurement of volatility comparison during a defined time bracket. It is also known as the Daily moving average or Average True Range. Turtles were allowed to take 4 positions maximum.
Under Dennis’s training, they were directed to take all signals to make sure that any winning position is not missed. As per Dennis, letting go of any potential signal during an entry period can result in the loss of a big winning chance.
Position Sizing
Position-sizing is a technical analysis technique for turtle traders that allow them to increase or decrease their trading positions based on market volatility.
Another important function of this tenet is to allow investors to diversify their portfolios by making sure that they maintain all of their assets in a proportionate ratio. For example, imagine a trader who has created several new investment positions in the market.
Depending on various factors, the market can present the perfect opportunity to increase trading positions or cut down on existing positions to prevent losses. However, a trader who does not have enough experience may face difficulty in finding out the correct ratio for their investment position size.
Therefore, turtle traders have techniques such as using a 20-day moving average to calculate the existing market volatility and base their portfolio diversification decisions based on the statistical results.
Market Dynamics
In addition to keeping an eye on their investment positions, Turtles also keep an eye out for the relevant market changes. Market Dynamics enables the turtles to conduct trades in a highly liquid market. It means that they are easily able to enter and exit positions without generating big position sizes.
Furthermore, turtles also switch between multiple trading options such as metal, bonds, commodities, stock market indexes, and energy options among others. Under the guidance of Dennis, turtles were allowed to start trading with futures contracts only one month after they started to trade.
Under normal circumstances, traders start dabbing in futures after gaining considerable market experience.
Tactics
The trading tactics were also laid out with bold colors for the traders by Dennis. He taught turtles about placing limited orders when present in a volatile market environment. Additionally, he also guided the investors about waiting for the unrest in the market to settle down before creating new positions.
Many new traders are swayed by the hype created in the market and the media reports about certain investment options. However, Dennis directed his trainees to purchase from strong markets which were relatively stable and sell in weaker markets. In this manner, turtles were able to make additional profits taking advantage of the difference in momentum.
Stops
Dennis trained his traders in managing risk for their investment positions. Most new investors make the mistake of not dissolving their positions even when the market has dropped below their purchase prices.
Therefore, Dennis instructed the turtles to envision the worst loss position beforehand and implement a stop-loss. He also ensured that turtles do not communicate their stop-losses to their brokers for big position sizes. It was done to make sure that the market does not know about the crucial exciting point.
Exits
Turtles also got defined and laid-out rules for exiting their trading positions. Dennis made it clear that exiting a position before the right time can snatch away the potential for making a sizeable profit.
For short positions, turtles used analysis from a 20-day moving average high. On the other hand, for long positions, they used a 10-day moving average low. Meanwhile, the second system for exiting used 20-day highs or lows.
At the same time, turtles were also trained to keep an eye on the latest price fluctuations happening in real-time rather than wholly depending on stop-losses.
Turtle Trading and Cryptocurrencies
In its classic form Turtle trading does not produce the best results as cryptocurrency trading. One of the main reasons for its lack of implementation in turtle trading is that it was designed for markets that have a relaxed correlation with other markets. However, cryptocurrencies have a strong correlation with price changes. Therefore, anyone who wishes to use turtle trading in DeFi should implement the following modifications first:
Follow the modified moving average technical analysis for finding out the best entry and exit points. During the 80s, turtles used a 20-day moving average. However, most modern investors go for a 200-day moving average.
Cryptocurrencies are much faster in comparison to traditional investment options. Therefore, the traders should experiment with different time ranges that can expand from 30 minutes, 4 hours, or 6 hours to process information from technical trading data.
Another great idea is to tinker with different stop-loss positions. Start by placing a stop-loss three points above for short positions and below for long positions.
Another good option is to try out different types of equity allocation positions based on the modified turtle trading strategies.
Start with cryptocurrencies that have ample support in the DeFi in the form of liquidity pools.
The key takeaway for all cryptocurrency investors who are learning about turtle trading is how it can improve their investing practice. Here are some of the most important lessons that cryptocurrency investors can adopt from Turtle Trading:
Logical Trading
One of the most important takeaways from Turtle Trading is learning to grasp a trading strategy. Whether the investors decide to go with turtle trading or any other trading technique, their main goal is to grasp the concept first before implementing it. It can seem very obvious but the traders who are starting often make this error.
Turtle trading encourages investors to implement one strategy first and master it. At the same time, investors should only implement multiple trading techniques if they are well-trained in them. In this manner, they can prevent the risk of losses and ensure that their trading skills keep improving over time.
Risk Mitigation
Risk Management is one of the most important teachings of Turtle trading. This trading technique teaches investors to plan out their risk management strategy in advance and detail. In this manner, the investors can envision the loopholes in their investment plan and be ready for any unwarranted market changes.
Investors who refrain from undertaking risk prevention techniques in their trading practice can face up to 97% drawdown probability annually. Therefore, the turtle trading school emphasizes the necessity of adopting risk mitigation tactics.
Adapting to the Market
The entire institution of Turtle trading is based on logical and technical thinking. It makes sure that investors take the difference in market dynamics for different investment options.
The idea postulates that turtles should not try to apply the same trading rules to cryptocurrencies that work on the stock market. The traders should take into account the failures or lags in the trading strategy based on the variable factors in different investment markets.
Planning
Many new traders make the mistake of creating new positions in the market based on market rumors or speculation. Their decision to sell or purchase a certain trade option is not backed by technical analysis or calculated strategies.
Therefore, they can face a lot of difficulty in keeping their trade positions open or experience an inability to find the best time to exit a position. Turtle Trading is a training method that makes sure that investors are backing their trading strategies based on solid facts and reliable analysis.
Conclusion
Turtle Trading is one of the most successful strategies for trading. The practice has been around for more than 40 years and it has aged well. It teaches the investors to not treat investing like a gamble and also introduces them to the most basic yet effective technical trading secrets.
Cryptocurrency traders can also benefit by learning about the various types of turtle trading techniques and trying to implement them to improve their digital portfolios.