Volatility – The Meaning of N

The Turtles used a concept that Richard Dennis and Bill Eckhardt called N to represent the underlying volatility of a particular market.

N is simply the 20-day exponential moving average of the True Range, which is now more commonly known as the ATR. Conceptually, N represents the average range in price movement that a particular market makes in a single day, accounting for opening gaps. N was measured in the same points as the underlying contract.

To compute the daily true range:

True Range = Maximum (H-L, H-PDC, PDC-L)

where:
H – Current High
L – Current Low
PDC – Previous Day’s Close

To compute N use the following formula:

N = (19 x PDN + TR)/20

where:
PDN – Previous Day’s N
TR – Current Day’s True Range

Since this formula requires a previous day’s N value, you must start with a 20-day simple average of the True Range for the initial calculation.

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Position Sizing

The Turtles used a volatility-based constant percentage risk position sizing algorithm.

Position sizing is one of the most important but least understood components of any trading system.

The Turtles used a position sizing algorithm that was very advanced for its day, because it normalized the dollar volatility of a position by adjusting the position size based on the dollar volatility of the market. This meant that a given position would tend to move up or down in a given day about the same amount in dollar terms (when compared to positions in other markets), irrespective of the underlying volatility of the particular market.

This is true because positions in markets that moved up and down a large amount per contract would have an offsetting smaller number of contracts than positions in markets that had lower volatility.

This volatility normalization is very important because it means that different trades in different markets tend to have the same chance for a particular dollar loss or a particular dollar gain. This increased the effectiveness of the diversification of trading across many markets.

Even if the volatility of a given market was lower, any significant trend would result in a sizeable win because the Turtles would have held more contracts of that lower volatility commodity.

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Markets: What the Turtles Traded

The Turtles traded liquid futures that traded on U.S. exchanges in Chicago and New York.

The Turtles were futures traders, at the time more popularly called commodities traders. We traded futures contracts on the most popular U.S. commodities exchanges.

Since we were trading millions of dollars, we could not trade markets that only traded a few hundred contracts per day because that would mean that the orders we generated would move the market so much that it would be too difficult to enter and exit positions without taking large losses. The Turtles traded only the most liquid markets.

In general, the Turtles traded all liquid U.S. markets except the grains and the meats. Since Richard Dennis was already trading the full position limits for his own account, he could not permit us to trade grains for him without exceeding the exchange’s position limits.

Liquidity
The primary criterion used to determine the futures that could be traded by the Turtles was the liquidity of the underlying markets.

We did not trade the meats because of a corruption problem with the floor traders in the meat pits. Some years after the Turtles disbanded, the FBI conducted a major sting operation in the Chicago meat pits and indicted many traders for price manipulation and other forms of corruption.

The following is a list of the futures markets traded by the Turtles:

Chicago Board of Trade

• 30 Year U.S. Treasury Bond
• 10 Year U.S. Treasury Note

New York Coffee Cocoa and Sugar Exchange

• Coffee
• Cocoa
• Sugar
• Cotton

Chicago Mercantile Exchange

• Swiss Franc
• Deutschmark
• British Pound
• French Franc
• Japanese Yen
• Canadian Dollar
• S&P 500 Stock Index
• Eurodollar
• 90 Day U.S. Treasury Bill

Comex

• Gold
• Silver
• Copper

New York Mercantile Exchange

• Crude Oil
• Heating Oil
• Unleaded Gas

The Turtles were given the discretion of not trading any of the commodities on the list. However, if a trader chose not to trade a particular market, then he was not to trade that market at all. We were not supposed to trade markets inconsistently.

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Mechanical trading system - Summary

Using a mechanical system is the best way to consistently make money trading. If you know that your system makes money over the long run, it is easier to take the signals and follow the system during periods of losses. If you rely on your own judgment, during trading you may find that you are fearful just when you should be courageous, or courageous when you should be fearful.

If you have a profitable mechanical trading system, and you follow it religiously, then your trading will be profitable, and the system will help you survive the emotional struggles that inevitably result from a long series of losses, or large profits.

The trading system that was used by the Turtles was a Complete Trading System. This was a major factor in our success. Our system made it easier to trade consistently, and successfully, because it did not leave important decisions to the discretion of the trader.

The Components of a Complete System - Part 2

(see Part 1 for beginning)

A Complete Trading System covers each of the decisions required for successful trading:

• Markets - What to buy or sell
• Position Sizing - How much to buy or sell
• Entries - When to buy or sell
• Stops - When to get out of a losing position
• Exits - When to get out of a winning position
• Tactics - How to buy or sell

Stops – When to get out of a losing position

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.

Exits – When to get out of a winning 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.

Tactics – How to buy or sell

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 Components of a Complete System - Part 1

A Complete Trading System covers each of the decisions required for successful trading:

• Markets - What to buy or sell
• Position Sizing - How much to buy or sell
• Entries - When to buy or sell
• Stops - When to get out of a losing position
• Exits - When to get out of a winning position
• Tactics - How to buy or sell

Markets – What to buy or sell

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.

Position Sizing – How much to buy or sell

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.

Entries – When to buy or sell

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.

(see Part 2 for continuation)

A Complete Trading System

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.

The Turtle Experiment

Richard Dennis wanted to find out whether great traders are born or made.

The age old question: Nature or nurture?

In mid-1983, famous commodities speculator Richard Dennis was having an ongoing 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.

Trading was Teachable
"Trading was even more teachable than I imagined," he says. "In a strange sort of way, it was almost humbling."
– Richard Dennis, Wall Street Journal.

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 Rich 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. We 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 we proved ourselves, Dennis funded most of us with $500,000 to $2,000,000 accounts at the start of February.

“The students were called the ‘Turtles.’ (Mr. Dennis, who says he 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.’)”
– Stanley W. Angrist, Wall Street Journal 09/05/1989

The Turtles became the most famous experiment in trading history because over the next four years, we earned an average annual compound rate of return of 80%.

Yes, Rich 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.

Continue reading. The complete set of the rules that Richard Dennis taught his trainees follows, starting with the next chapter.

The Genesis of the Project

Like many of the other Turtles, it always bothered me that some were making money off the work of Richard Dennis and Bill Eckhardt without their consent; that these secret-sellers had used the success of the Turtles to dupe others into spending thousands of dollars on products that were not what they appeared.

I had often thought that a great way to deal with this problem would be to give the Turtle Trading Rules away for free. Since others had already let the cat out of the bag, and since anyone who really wanted the rules could already get them by paying, it wouldn’t violate my sense of fair play to reveal them.

So that is what we have done....with a slight twist.

While the rules are free, we respectfully ask that those who gain benefit from the rules and find them valuable send a donation supporting a charity in honor of Richard Dennis, Bill Eckhardt and the original Turtles. You can find a copy of the charities favored by the Turtles on the new web site: originalturtles.org.

Rules You Won’t Follow Don’t Matter

What TurtleTrader.com and the Former Turtle don't tell you is that 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.

Following Rules
As famous trader and father of the Turtles, Richard Dennis said: “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 list 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 D. Schwager.

The Turtles had a lot of reasons to be confident in the rules they were given. For the most part, we 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.

As original Turtles, we had it easy. We were given rules by some of the world’s most successful and famous traders, Richard Dennis and his trading partner Bill Eckhardt. They taught us the rules and the reasons why we could trust those rules. Then we were placed into an open office with ten other traders who had been taught those same rules. In some respects it was easier to follow the rules than to not follow the rules.

On the whole, we had the confidence and the discipline to consistently apply the rules we were given. This was the secret of our success as traders.

Those who failed to follow the rules invariably failed as Turtles. Some of them decided they could make more money selling the Turtle rules than they did as Turtles.

The Ugly Truth about the System Sellers

I’ve been trading and hanging around trading circles since high school. One of the sad realities of the trading industry, and the futures trading industry in particular, is that there are far more people making money selling others’ systems and “ways to make money trading,” than there are people actually making money trading.

I won’t go into specifics here, but those of us who actually trade for a living know the names of many “famous traders” who are famous as “traders,” but that don’t make money as traders. They make money selling new trading systems, seminars, home study courses, etc. Most of these so called “experts” can’t trade and don’t trade the systems that they sell.

Yes, this is also true of those selling the Turtle Trading Rules. Consider the major sellers: the first, a web site, TurtleTrader.com, and the second, a former turtle. Here’s what they won’t tell you:

TurtleTrader.com - A web site run mainly by one guy (an admittedly talented web marketer that also has a pharmacy site and a site that sells personality tests), turtletrader.com purports to have the actual Turtle Trading Rules, and will sell them to you for $999.00. The site is filled with huge amounts of information about trading, and bills itself as the “No. 1 Source for Trend Following Worldwide.”

What they don’t tell you is that the site is run by a guy who doesn’t even trade his own rules—or trade at all for that matter—and has never been a successful trader. Yet he purports to be an expert on the “Turtle Trading Rules,” and on trend following!

You can get something close to the actual rules from this site, but you won’t get any expert advice from the guy who runs it. All you will get is the regurgitation of advice from other traders that is not tempered by the experience of a successful trading career. Paying for advice from this source is a lot like hiring a blind guide.

In the final analysis, TurtleTrader.com is not any better than other scams and system selling hucksters he warns about. It is a site run by a guy who appears to me to be more interested in taking his customers’ money than he is in their success with the system he sells; a site run by someone who misrepresents himself as an expert in trend following, yet doesn’t mention that he doesn’t trade.

The money-back guarantee is almost worthless; you have to keep a log of all your trades and prove that you made them in the markets by providing your brokerage statements. If you don’t like the rules and want your money back, it seems exceedingly unlikely that you would open a trading account and then trade for a year just to get the refund.

Former Turtle - This individual, a former turtle, sells tapes, books, hotlines, videos, seminars, and more, for prices ranging from $29.95 to $2,500. What the Former Turtle won’t tell you is that he never made money as a turtle; in fact he didn’t last a full year as a turtle before he was fired from the turtle program because he couldn’t trade the Turtle System Rules successfully. He lost money while most of the other traders were making a lot of money.

The Former Turtle lends credence to the oft quoted maxim: “Those that can do, those that can’t teach.”

I haven’t seen the seminar or read the books, but I can’t imagine how someone who couldn’t make money after having been taught directly by Richard Dennis can explain to others how to trade using the Turtle Trading Rules.

The Origin of the Free Rules Project

This project had its seed in various discussions among a few of the original Turtles, Richard Dennis, and others regarding the sale of the Turtle Trading System rules by a former turtle, and subsequently, on a website by a non-trader. It culminated in this document, which discloses the Original Turtle Trading Rules in their entirety, free of charge.

Why? Because many of us believed that we owed an obligation to Richard Dennis not to reveal the rules, even after our contractual 10 year secrecy pact ended in late 1993. For this reason, we did not look kindly upon the sale of those rules by a former turtle.

Further, we saw the sale on the web site as crass and opportunistic intellectual property

theft, an act that, while technically not illegal, was certainly not honorable.

At the same time, having seen others try to follow these rules first-hand, I realized it was unlikely that their publication would result in very many people actually learning to trade like the Turtles. In fact, I knew that most of those who spent thousands to learn these heretofore secret rules would end up disappointed, for three reasons:

• The rules wouldn’t be clear, since the people selling them didn’t know how to trade.
• Even if they were clearly presented, the buyers probably wouldn’t be able to follow the rules.
• Most of the Turtles are now trading even better rules.

Free Rules? Are you kidding?

Why are some of the Original Turtles giving away Rules for which others have charged thousands of dollars? Are these the actual Original Turtle Trading System rules?

You probably asked yourself the same questions: “Why would anyone give away the rules to the original Turtle Trading System? How can I be sure that these are the original Turtle Trading System rules as taught by Richard Dennis and William Eckhardt?” The answer to these questions lies in the origin of this project. Just read on.