In mid-1983, famous commodities speculator Richard Dennis was having an on going dispute with his long-time friend Bill Eckhardt about whether great traders were born or made. Richard believed that he could teach people to become great traders.
Bill thought that genetics and aptitude were the determining factors. In order to settle the matter, Richard suggested that they recruit and train some traders, and give them actual accounts to trade to see which one of them was correct.
They took out a large ad advertising positions for trading apprentices in Barron’s, the Wall Street Journal and the New York Times. The ad stated that after a brief training session, the trainees would be supplied with an account to trade. Since Richard was probably the most famous trader in the world at the time, he received submissions from over 1000 applicants.
Of these, he interviewed 80. This group was culled to 10, which became 13 after Rich added three people he already knew to the list. The traders were invited to Chicago and trained for two weeks at the end of December, 1983, and began trading small accounts at the beginning of January. After they had proved themselves, Dennis funded most of them with $500,000 to $2,000,000 accounts at the start of February.
The students were called the “Turtles.” Richard Dennis, who had just returned from Asia when he started the program, explains that he described it to someone by saying, “We are going to grow traders just like they grow turtles in Singapore.”
The Turtles became the most famous experiment in trading history because over the next four years, they earned an average annual compound rate of return of 80%. Yes, Richard proved that trading could be taught. He proved that with a simple set of rules, he could take people with little or no trading experience and make them excellent traders.
The Turtle Trading System was a Complete Trading System, one that covered every aspect of trading, and left virtually no decision to the subjective whims of the trader. Most successful traders use a mechanical trading system. This is no coincidence.
A good mechanical trading system automates the entire process of trading. The system provides answers for each of the decisions a trader must make while trading. The system makes it easier for a trader to trade consistently because there is a set of rules which specifically define exactly what should be done.
The mechanics of trading are not left up to the judgment of the trader. If you know that your system makes money over the long run, it is easier to take the signals and trade according to the system during periods of losses. If you are relying on your own judgment during trading, you may find that you are fearful just when you should be bold, and courageous when you should be cautious.
If you have a mechanical trading system that works, and you follow it consistently, your trading will be consistent despite the inner emotional struggles that might come from a long series of losses, or a large profit. The confidence, consistency, and discipline afforded by a thoroughly tested mechanical system are the key to many of the most profitable traders’ success.
The Turtle Trading System was a Complete Trading System. Its rules covered every aspect of trading, and left no decisions to the subjective whims of the trader. It had every component of a Complete Trading System.
Note: Full details of each section on next page.
The first decision is what to buy and sell, or essentially, what markets to trade. If you trade too few markets you greatly reduce your chances of getting aboard a trend. At the same time, you don’t want to trade markets that have too low a trading volume, or that don’t trend well.
The decision about how much to buy or sell is absolutely fundamental, and yet is often glossed over or handled improperly by most traders. How much to buy or sell affects both diversification and money management. Diversification is an attempt to spread risk across many instruments, and to increase the opportunity for profit by increasing the opportunities for catching successful trades. Proper diversification requires making similar, if not identical bets on many different instruments. Money management is really about controlling risk by not betting so much that you run out of money before the good trends come. How much to buy or sell is the single most important aspect of trading. Most beginning traders risk far too much on each trade, and greatly increase their chances of going bust, even if they have an otherwise valid trading style.
The decision of when to buy or sell is often called the entry decision. Automated systems generate entry signals which define the exact price and market conditions to enter the market, whether by buying or selling.
Traders who do not cut their losses will not be successful in the long term. The most important thing about cutting your losses is to predefine the point where you will get out before you enter a position.
Many “trading systems” that are sold as complete trading systems do not specifically address the exit of winning positions. Yet the question of when to get out of a winning position is crucial to the profitability of the system. Any trading system that does not address the exit of winning positions is not a Complete Trading System.
Once a signal has been generated, tactical considerations regarding the mechanics of execution become important. This is especially true for larger accounts, where the entry and exit of positions can result in significant adverse price movement, or market impact.
The trading system that was used by the Turtles was a Complete Trading System. This was a major factor in their success. Their system made it easier to trade consistently, and successfully, because it did not leave important decisions to the discretion of the trader.
Trading rules are only a small part of successful trading. The most important aspects of successful trading are confidence, consistency, and discipline. Rules that you can’t or won’t follow will not do you any good. The Turtles had a lot of reasons to be confident in the rules they were given. For the most part, they had the confidence to follow them even during losing periods.
Those who didn’t consistently follow the rules didn’t make money and were dropped from the program. Traders who want to be successful will figure out a way to gain enough confidence in their own rules of trading to be able to apply them consistently.
Good judgment comes from experience, and experience comes from bad judgment.
If you want to become a trader, you must start to trade. There is no substitute. You must also make mistakes. Making mistakes is part of trading. If you don’t start trading using actual money-and enough money that it affects you when you win or lose-you won’t learn all the lessons of trading. Paper trading is not a substitute for trading with real money.
f you aren’t using real money, you won’t learn how hope, fear, and greed affect you personally.
Experience is that marvelous thing that enables you to recognize a mistake when you make it again.