The Turtle Trading Experiement: A Successful Market Legend (2024)

In 1983, legendarycommodity tradersRichard Dennis and William Eckhardt heldthe turtle experiment to prove that anyone could be taught to trade.Using his own money and trading novices, how did the experiment fare?

The Turtle Experiment

By the early 1980s, Dennis was widely recognized in the trading world as an overwhelming success. He had turned an initial stake of less than $5,000 into more than $100 million. He and his partner, Eckhardt, had frequent discussions about their success. Dennis believed anyone could be taught to trade the futures markets, while Eckhardt countered that Dennis had a special gift that allowed him to profit from trading.

The experiment was set up by Dennis to finally settle this debate. Dennis would find a group of people to teach his rules to, and then have them trade with real money. Dennis believed so strongly in his ideas that he would actually give the traders his own money to trade. The training would last for two weeks and could be repeated over and over. He called his students "turtles" after recalling turtle farms he had visited in Singapore and deciding that he could grow traders as quickly and efficiently as farm-grown turtles.

Finding the Turtles

To settle the bet, Dennis placed an ad in The Wall Street Journal, and thousands applied to learn trading at the feet of widely acknowledged masters in the world of commodity trading. Only 14 traders would make it through the first "Turtle" program. No one knows the exact criteria Dennis used, but the process included a series of true-or-false questions, a few of which you can find below:

1. The big money in trading is made when one can get long at lows after a big downtrend.
2. It is not helpful to watch every quote in the markets one trades.
3. Others' opinions of the market are good to follow.
4. If one has $10,000 to risk, one ought to risk $2,500 on every trade.
5. On initiation, one should know precisely where to liquidate if a loss occurs.

For the record, according to the Turtle method, 1 and 3 are false; 2, 4, and 5 are true.

The Rules

Turtles were taught very specifically how to implement a trend-following strategy. The idea is that the "trend is your friend,"so you should buy futures breaking out to the upside of trading ranges and sell short downside breakouts. In practice, this means, for example, buying new four-week highs as an entry signal. Figure 1 shows a typical turtle trading strategy.

Figure 1: Buying silver using a 40-day breakout led to a highly profitable trade in November 1979

Source: Genesis Trade Navigator

This trade was initiated on a new 40-day high. The exit signal was a close below the 20-day low. The exact parameters used by Dennis were kept secret for many years, and are now protected by various copyrights. In "The Complete TurtleTrader: The Legend, the Lessons, the Results" (2007), author Michael Covel offers some insights into the specific rules:

• Look at prices rather than relying on information from television or newspaper commentators to make your trading decisions.
• Have some flexibility in setting the parameters for your buy and sell signals. Test different parameters for different markets to find out what works best from your personal perspective.
• Plan your exit as you plan your entry. Know when you will take profits and when you will cut losses.
• Use the average true range to calculate volatility and use this to vary your position size. Take larger positions in less volatile markets and lessen your exposure to the most volatile markets.
• Don't ever risk more than 2% of your account on a single trade.
• If you want to make big returns, you need to get comfortable with large drawdowns.

Did It Work?

According to former turtle Russell Sands, as a group, the two classes of turtles Dennis personally trained earned more than $175 million in only five years. Dennis had proved beyond a doubt that beginners can learn to trade successfully. Sands contends that the system still works well and said that if you started with $10,000 at the beginning of 2007 and followed the original turtle rules, you would have ended the year with $25,000.

Even without Dennis' help, individuals can apply the basic rules of turtle trading to their own trading. The general idea is to buy breakouts and close the trade when prices start consolidating or reverse. Short trades must be made according to the same principles under this system because a market experiences both uptrends and downtrends. While any time frame can be used for the entry signal, the exit signal needs to be significantly shorter in order to maximize profitable trades.

Despite its great successes, however, the downside to turtle trading is at least as great as the upside. Drawdowns should be expected with any trading system, but they tend to be especially deep with trend-following strategies. This is at least partly due to the fact that most breakouts tend to be false moves, resulting in a large number of losing trades. In the end, practitioners say to expect to be correct 40%-50% of the time and to be ready for large drawdowns.

The Bottom Line

The story of how a group of non-traders learned to trade for big profits is one of the great stock market legends. It's also a great lesson in how sticking to a specific set of proven criteria can help traders realize greater returns. In this case, however, the results are close to flipping a coin, so it's up to you to decide if this strategy is for you.