In Mid 1983 the Famous speculator Richard Dennis argues with his buddy Bill Eckhardt about whether great traders can be trained, or whether it is an innate ability. To settle the argument of nature versus nurture, they decided to teach 13 beginners to trade, and if they can master the rules, fund them with trading accounts. These beginners are known as the ‘Turtles’. Over the next four years, the Turtles earned a collective compound rate of return of over 80%. Argument settled and Turtles trading system started.
‘N’, the 20 day exponential moving average of the ATR, is used by turtles. It is used under the name’Volatility normalisation’. It is nothing but stating an hypotheses that smaller the trade, every instrument will carry the same monetary risk in times of volatility.
The working of turtles ‘notional’ accounts needs to be understood properly. It means that if a 10% loss happens with the initial amount, then the effective trading amount available for the trader would be reduced by 20%. To illustrate, if the initial amount is $1,000,000, then a 10% loss would leave the trader to trade with $800 and not $100.
Turtles adopted two different approaches to trading viz. 20 day breakout system and 50 day breakout system. Under the 20 day breakout system, if the price of a stock traded at the 20 day high/low price, it portends a signal to do some trading. A single unit would wither be bought or sold to indicate one’s position. In case, the previous had resulted in successful trade, the current signal would be ignored so as to avoid “whipsawing”.
Once in a position, Turtles trading system would add a Unit every 1/2 ‘N’ advance, up to the maximum number of units they were permitted (4 in a single instrument, 6 in ‘Closely Correlated’ markets, such as Oil and Crude, 10 units in ‘Loosely Correlated’ markets, 12 units overall in a single direction).The prime directive in all of this was CONSISTENCY. As the majority of trades failed, it was essential to be in on ALL of them, so as not to miss the few huge winners that made the profits.
The Turtles trading system undoubtedly works. However, it requires iron willpower to follow the rules, and not to try and ‘bend’ the mechanics of the strategy.