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Ask Mint | Turtle trading rules: iron-clad tenets for buy, sell decisions

Ask Mint | Turtle trading rules: iron-clad tenets for buy, sell decisions
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First Published: Sun, Dec 28 2008. 11 02 PM IST

Updated: Sun, Dec 28 2008. 11 02 PM IST
Trading rules look great when everything seems to be going as per your expectations. The real testing time comes when things start moving to the extremes either for good or for worse. In such situations, the so-called rules often start falling apart like castles made of sand. Then what’s the formula of making successful trading rules? You can pick up a bunch of turtles, teach them a little Greek, and give them a set of your grandma’s secret trading rules. If your turtles have enough discipline, confidence and good luck, you can very well come out with your own turtle trading experiments. Not convinced? Then read on:
Johnny: I recently heard about many people who claim to teach the “original turtle trading rules”. Do you have any idea about turtle trading rules, Jinny?
Jinny: Frankly speaking, I don’t claim myself to be the one who can teach you the “original turtle trading rules”. But I can surely share some of the facts and fiction surrounding turtle trading rules that are available in the public domain. Turtle trading rules came into existence out of one of the most interesting trading experiments started by Richard Dennis and William Eckhardt in 1983. Dennis himself was a highly successful trader in commodity futures in the US, who believed that successful traders are not born but made. In other words, it is not nature but nurture that makes a successful trader. His partner, Eckhardt, on the other hand, believed that traders are born with certain innate qualities which everybody can’t have. For conclusively proving his point, Dennis started his great experiment of converting ordinary mortals into successful traders, which became popular as the “turtle trading experiment”.
Johnny: What a peculiar name for the experiment! Tell me, how exactly were these experiments conducted?
Illustration: Jayachandran / Mint
Jinny: Just before the experiment, Dennis had returned from Singapore where he had seen turtles being grown in farms. He said to his partner that he wanted to grow traders just like they grow turtles in Singapore. This is how the whole experiment came to be known as turtle trading experiment. To carry out his experiment, Dennis advertised in The Wall Street Journal asking people with no prior experience of trading to apply for his training programme after which each one of the participants would be provided money to start trading independently. It is said that thousands of people responded to the advertisement, out of which a dozen people with diverse backgrounds were selected for the training. Turtle trading system was a highly mechanical trend-following system in which traders relied on a set of trading rules for identifying whether the market was going to move upwards or downwards. The rules left very little room for traders to exercise their own judgement. In a nutshell, the turtle trading rules defined what to buy or sell, how much to buy, when to buy, when to exit, how to buy or sell, etc. Dennis himself believed that more than anything else, sincerity, disciple and full confidence of the traders in the rules were most important for the success of the whole experiment.
Johnny: What was the final outcome of the whole experiment?
Jinny: It is claimed that the whole experiment was highly successful. Many claim that turtle traders made millions of dollars by using their secret trading rules. Dennis himself in an interview with Jack D. Schwager, the famous author of Market Wizards, said that the turtle traders started their trading with $100,000 each and averaged about 100% profit per year. That sounds astonishing! You may wonder what sorts of trading the turtles were doing. Well, turtles mostly traded commodity futures on the US exchanges in Chicago or New York that were considered highly liquid. The size of their trade in any particular commodity was the most important aspect of their trading system. A novice picks up whatever size catches his fancy but the turtles used to go by the rules. They used volatility-based algorithms to decide the size of their trade in any commodity futures. Their basic premise was simple. When you are trading in different markets in different products, some will have high volatility whereas some will have less. The key is to counterbalance the positions so that overall your positions do not experience excess volatility. As a rule of thumb, the higher the volatility, the lower the exposure turtles had in that particular commodity future.
Johnny: After such a successful experiment, Dennis must have continued to live a very happy life.
Jinny: Well, after all the successes, Dennis had to face a sad end. He incurred significant losses in the stock market crash of 1987, after which he declared his retirement from trading life. With that, the great turtle trading experiment came to an end.
While Dennis himself maintained a low profile, many people have come forward to teach the world the secrets of turtle trading rules.
Johnny: Well, Jinny, I believe in what George Bernard Shaw once rightly said: “The golden rule is that there are no golden rules.”
What: “Turtle trading rules” came into existence out of one of the most interesting trading experiments conducted during the 1980s.
How: The experiment relied on a set of trading rules to identify the market trend, based on which buy or sell decisions were made.
Who: Richard Dennis, a highly successful US trader in commodity futures, and his partner William Eckhardt were behind the experiment.
Shailaja and Manoj K. Singh have important day jobs with an important bank. But Jinny and Johnny have plenty of time for your suggestions and ideas for their weekly chat. You can write to both of them at realsimple@livemint.com
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First Published: Sun, Dec 28 2008. 11 02 PM IST