Tag Archives: Price Breakouts

Turtle of the First

10 August 2023 By in Books Nonfiction, Trading Tags: , , , , , , , , , , , , , , , Leave a comment

Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders

By Curtis M. Faith

Published by McGraw-Hill

Copyright: © 2007

Curtis Faith — Amazon Picture

(Note: This is the first of 3 reviews detailing the stories and methods of stock market trend followers and traders that collectively became known as ‘Turtles’. Curtis Faith was a turtle and a trader. The two reviews following this one concern publications by Michael Covel a market writer and trading coach who has lectured and written extensively on trend trading and Turtles.)

In 1983 Richard J. Dennis and his partner at C&D Commodities, their Chicago trading firm, budgeted $15,000 to run a recruitment ad in the Wall Street Journal, Barrons, and the International Herald Tribune seeking recruits to train in futures trading:

…Mr. Dennis and his associates will train a small group of applicants in his proprietary trading concepts. Successful candidates will then trade solely for Mr. Dennis: they will not be allowed to trade futures for themselves or others. Traders will be paid a percentage of their trading profits, and will be allowed a small draw. Prior experience in trading will be considered, but is not necessary. Applicants should send a brief resume with one sentence giving their reasons for applying…

From Richard J. Dennis et al ad in the above-mentioned newspapers and magazine.

The ad was the opening volley to proving a nature versus nurture disagreement between Dennis and his partner William Eckhardt. Dennis believed successful trading could be taught. Eckhardt, a mathematician by training turned trader, believed trading was innate, natural, inborn. You either had it or you didn’t, and no amount of teaching could change that.

To settle the debate Dennis agreed to teach his trading style and rules to a select group, letting them learn the craft using his money. From the firm’s ad and a follow-up true and false questionnaire they cobbled together a group of candidates, 23 in two tranches of 14 and 9 that were taught the firm’s trading rules. The traders came to be known as ‘Turtles’ because Dennis had seen a turtle farm, of all things, in Singapore and he believed he could raise traders as efficiently as Singaporeans raised turtles.

Over the next 5 years the ‘Turtles’ as a whole earned, made is probably a better word, $175,000,000. Dennis won the bet, but he worried that no amount of instruction could ultimately overcome human nature. Not sure if the following quote is a contradiction or just plain old irony but he worried his ‘Turtles’ couldn’t remain true to their training, stating “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 set 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” (from Market Wizards, by Jack Schwager).

Curtis Faith was a ‘Turtle’ selected in the first group and began trading under Dennis and Eckhardt’s tutelage in 1984. He was C&D Commodities’ most successful student, reportedly earning $31.5 million for the firm by the end of the experiment. To put that into context the 23 ‘Turtles’ as a whole averaged a little over $7.5 million each. Some twenty plus years later Faith published a book detailing his experience and methods living in ‘Turtle Time’ during the 1980s (apologies to Danny Flowers and Don Williams).

Faith was a risk taker, and he was probably the greatest risk taker of all the ‘Turtles’, even greater than Richard Dennis. Taking and managing risk is what traders do. They buy and sell risk. And you need nerves of steel or as Dennis states above: discipline. When managing risk, one needs a plan to get into a security and a plan to get out. In the immortal words in Don Schlitz’s 1976 song ‘The Gambler‘ made famous by Kenny Rogers: “You got to know when to hold them, know when to fold them…”

Traders buy and sell liquidity and price risk. Market Makers trade liquidity–making money off the spread between buy and sell prices. Speculators trade price risk. Buying low and selling high. Or with ‘Turtles’ buying high and selling higher or vice versa.

Speculators are not long-term investors. Speculators are short-term traders who have no desire or need to find the intrinsic or fundamental value of any security. Their only concern is price and which way is it moving; up, down, or sideways. The statistical analysis of price momentum and sometimes volume are the tools of the trade for the short-term speculators. This is usually referred to as technical analysis and technical trading.

Turtles are speculators, technical traders, playing trends in price that may not have a fundamental basis. Price trends without a fundamental basis are almost by definition irrational.

Adam Smith in his ‘Wealth of Nations’ postulated the first form of the Rational Choice Theory, that an individual’s actions are mostly selfish, which he dubbed the ‘Invisible Hand’. The theory suggests that individuals act in their own best interest and that their behavior is rational. At the beginning of the 20th century the hypothesis that the markets are efficient and rational began to take hold among traders and economists. This led to the Efficient-Market Hypothesis (EMH) or Theory that maintains that valuations or prices for assets such as stocks and bonds reflect all available information and are fairly valued. Only added information will then affect the price of an asset. This implies that it is impossible to beat the market. Just invest in DIAs, IWMs, SPYs, and QQQs and forget about them until you retire.

Faith and the Turtles say bunk to all that market rationality and index investing. Technical trading and trading like a turtle works because market movements are driven by the irrational collective behavior of the market participants or so they believed.

Turtles were trend followers attempting to take advantage of large price increases or decreases over a period of several months. Significant profitable trends happen infrequently with a high percentage of promising trend trades turning south soon after placing them. They experienced significantly more losers than winners but exited their losses quickly, usually around 20% below entry price.

Following trends is geared towards the present and what the market is currently doing. It is never about trying to predict the future. They entered trades when the calculated probabilities, through technical analysis, were in their favor.

The Turtle method was simple and easy to understand. The strategy could be summed up in one sentence. Trade with an edge, manage risk, be consistent, and keep it simple.

Trade with an edge. Have a plan and stick to it. Through experience or preferably back testing find a trading strategy that will have positive returns over the long run.

Manage your risk. Control your risk or in other words don’t bet the bank on a single trade and don’t hang onto your losers hoping for a turnaround.

Be consistent in executing your strategy. Do not jump into trades that look interesting but fail the tactical elements of your plan.

Keep it simple and follow your plan. Most of your trades may be losers but the winners will make up for the shortfall or drawdown. Think in terms of the long game and don’t fixate on the individual losing trades.

The Turtles tactics used in implementing their strategy were also simple.

  • Turtles traded liquid futures such as commodities, currencies, metals, energy, and bonds.
  • The Turtle’s most complicated tactic was position sizing the trades. Generally, the more liquid the market the fewer the contracts they traded.
  • The Turtles identified trends using two similar systems employing price breakouts at 20 and 55 days. They tried to enter as many of these breakouts as possible so as not to miss out on the rare but very profitable, large price movements.
  • All trades had stop losses.
  • Trade exits were set as a 10-day low for long positions and a 20-day high for shorts. They never exited a trade at maximum profitability but only when the end of the trend was evident.

Simple stuff and they made $175,000,000 with it. Dennis reportedly made $200,000,000 trading his own account.

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