The Turtle System

In 1983, famous fund manager Richard Dennis and his partner William Eckhardt had a disagreement. Dennis thought that great traders could be made through systematic mentorship, while Eckhardt disagreed and believed that great traders were simply born. In order to settle the difference, they decided to hire a group of people with little to no trading experience, and see if they could the students to manage real money and trade successfully.

The wager was famously called the Turtle Experiment because of a quote by Dennis. Before the experiment happened, Dennis happened to have visited a turtle farm in Asia, and he told the Wall Street Journal, “We are going to grow traders like they grow turtles in Singapore.” (Faith, 2003) After the class was assembled, which had thirteen students in total, they began a fortnight of training and then they started trading immediately.

And the result was stunning. Over the next four and a half years, the group of students achieved an average compound return of 80% per annum! It is one of the most amazing stories in the investing world. No wonder even Eckhardt later confessed, “Anyone with average intelligence can learn to trade. This is not rocket science.” (Schwager, 1992)

So how were the students able to this? What system did they use to trade? In 2003, a former Turtle trader revealed the complete Turtle system for free on the Internet. Below is a summary of the rules:

Part 1: Entry and Exit

There are two systems with which the Turtles trade.

	Entry ¹ ²	Exit ² ³
System One	Long at twenty-day high Short at twenty-day low	Exit Long at ten-day low Exit Short at ten-day high
System Two	Long at fifty-five-day high Short at fifty-five-day low	Exit Long at twenty-day low Exit Short at twenty-day high

¹ For System One, only takes a signal when the previous System One signal (regardless long or short) was not profitable. System Two had no such restriction.

² All entries and exits signals are applicable intraday, i.e. no need to wait for the close.

³ For all exits rules above, it applies only if the stop loss is not reached. See below for more about stops.

Part 2: Position Sizing

It is often said that money management (i.e. how much to trade and risk) is the key to speculative wealth. The Turtles paid a lot of attention to position sizing. In the Turtle System, the position size is measured in terms of units. One unit of entry in a market is calculated by:

One Unit = (1% x Account Capital) / (Dollar per Point x N)

And N is the 20-day average true range as of the day of initial entry.

In order to control risk, there is a restriction of maximum available to trade:

● In any single market: no more than four units

● In closely correlated markets: no more than six units (like gold and silver)

● In loosely correlated markets: no more than ten units (like gold and copper)

● In any single direction: no more than twelve units (max: twelve long and twelve short)

Part 3: Trailing Stops and Additional Units

As stated above, there are a maximum of four units in each market. Here is how they are added, and how the stops are set.

For long entries, suppose the initial entry is made at price E, then additional units is added for the rise of 0.5 N in price, until the maximum number of units are added in a given market (see the rules above). The stop loss arrangement is as follows:

	Entry Level	Average Entry	Stop
When the initial unit is added:
First entry	E	E	E - 2 N
When the second unit is added:
First entry	E	E + 0.25 N	E - 1.5 N
Second entry	E + 0.5 N		E - 1.5 N
When the third unit is added:
First entry	E	E + 0.5 N	E - N
Second entry	E + 0.5 N		E - N
Third entry	E + N		E - N
When the fourth unit is added:
First entry	E	E + 0.75 N	E - 0.5 N
Second entry	E + 0.5 N		E - 0.5 N
Third entry	E + N		E - 0.5 N
Fourth entry	E + 1.5 N		E - 0.5 N

Alternatively, there is a more aggressive way to placing stops, that the initial stop levels are not moved with the addition of units. It allows more freedom for the price to retrace, but also more likely to have larger losses:

	Entry Level	Average Entry	Stop
When the initial unit is added:
First entry	E	E	E - 2 N
When the second unit is added:
First entry	E	E + 0.25 N	E - 2 N
Second entry	E + 0.5 N		E - 1.5 N
When the third unit is added:
First entry	E	E + 0.5 N	E - 2 N
Second entry	E + 0.5 N		E - 1.5 N
Third entry	E + N		E - N
When the fourth unit is added:
First entry	E	E + 0.75 N	E - 2 N
Second entry	E + 0.5 N		E - 1.5 N
Third entry	E + N		E - N
Fourth entry	E + 1.5 N		E - 0.5 N

The above rules are vice versa for short trades.

For most traders, exit is probably the hardest part to follow. It often means that you have to watch a large part of your profit to disappear, or seeing a profit turning into a loss. It is tempting to take a small profit when it is there, or to hold onto losses and hoping them to turn into gains. Resist that! To capture a really large profit in the market, one must have to discipline to cut losses short and let the profits run.

Even Richard Dennis himself said, “I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.” (Schwager, 1989)

References:
Faith, C. (2003). The Original Turtle Trading Rules. Retrieved on 1st June 2016 from here.
Schwager, J. D. (1989). Market Wizards: Interviews with America’s top stock traders. New York: HarperBusiness. Hoboken, NJ: John Wiley & Sons.
Schwager, J. D. (1992). The New Market Wizards: Conversations with America’s top stock traders. New York: HarperBusiness. Hoboken, NJ: John Wiley & Sons.