Richard Dennis, a legendary commodities trader, captivated the financial world with his audacious experiment: could trading be taught? His answer came in the form of the “Turtle Traders,” a group of individuals with little to no prior trading experience, whom he trained using a specific, rules-based system. The success of these Turtles proved Dennis’ point and solidified his place in trading history. Delving into how Richard Dennis formulated his trading system is a fascinating journey into risk management, trend following, and the power of disciplined execution. This article explores the key elements and background of the Turtle trading system.
The Genesis of a Trend Following Strategy
Dennis believed that successful trading wasn’t about innate talent, but rather a set of learnable rules and principles. His system was heavily influenced by trend following, a strategy that aims to capture profits by riding the momentum of established trends. He sought to identify markets trending strongly and enter positions, holding them until the trend reversed. This approach required a disciplined mindset and the ability to withstand short-term losses, as trend-following systems often experience periods of drawdown.
Key Components of the Turtle Trading System
The Turtle trading system wasn’t a black box, but rather a clearly defined set of rules covering all aspects of trading, from market selection to position sizing and risk management. Here’s a breakdown of the core elements:
- Market Selection: The Turtles traded a diversified portfolio of commodities, currencies, and bonds, aiming to capture trends across various markets.
- Position Sizing: Dennis emphasized the importance of proper position sizing to control risk. He used a concept called “N,” which represented the average true range (ATR) of a market, to determine the appropriate position size.
- Entry Rules: The system used two entry signals:
- System 1: A 20-day breakout. If the price exceeded the highest high of the previous 20 days, a long position was entered.
- System 2: A 55-day breakout. A more conservative signal, triggering a long position when the price exceeded the highest high of the previous 55 days.
- Stop-Loss Orders: Stop-loss orders were crucial for limiting losses. They were typically placed a certain number of “N” away from the entry price.
- Exit Rules: Exit rules were designed to capture profits and cut losses quickly. Exits were triggered by opposite breakouts – a 10-day low for System 1 and a 20-day low for System 2.
Richard Dennis: Mentorship and the Turtle Experiment
The Turtle experiment was a social experiment as much as a trading one. Dennis sought out individuals from diverse backgrounds and put them through a rigorous training program. He instilled in them the importance of following the rules, managing risk, and remaining disciplined, even when faced with losing streaks. He provided capital and allowed them to trade under his guidance, sharing in the profits (and losses).
Turtle Trading System: Advantages and Disadvantages
Like any trading strategy, the Turtle system has both advantages and disadvantages. Understanding these can help traders determine if it’s a suitable approach for them.
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FAQ: Turtle Trading Strategy
Is the Turtle Trading System still profitable today?
While the market conditions have changed since the original Turtle experiment, the underlying principles of trend following and risk management remain relevant. However, modifications and adaptations may be necessary to suit current market dynamics.
What markets did the Turtles trade?
The Turtles traded a variety of liquid markets, including commodities like gold, silver, oil, and grains, as well as currencies and bonds.
How important is risk management in the Turtle Trading System?
Risk management is paramount. The Turtles were taught to prioritize capital preservation and to limit losses on any single trade.
Can I learn the Turtle Trading System?
Yes, the principles and rules of the Turtle Trading System are well-documented and can be studied. Numerous books and online resources are available.
