The turtle experiment was conducted by commodity traders Richard Dennis and William Eckhardt in 1983 to demonstrate that anyone could learn how to trade. So what was the outcome of the investigation using his own money and novice traders? Read on to find the conceptual basics of Turtle trading!
The turtle experiment
As early as the 1980s, Dennis was highly known as an overwhelming successful trader in the trading community. With a stake of less than $5,000, he turned his initial investment into over $100 million.
Together with Eckhardt, he frequently talked about their success. Eckhardt argued Dennis had a special gift that allowed him to make money in the futures markets, contrary to Dennis’ belief that anyone could be taught to trade futures.
Dennis set up the experiment to finally settle this dispute. He then decided to teach his trading rules to people first, then practice with actual money. Finally, he was so convinced of the validity of his ideas that he would invest his own money with the traders.
The course would last for two weeks and could be taught numerous times. His students are referred to as turtles because he was reminded of turtle farms in Singapore and decided to grow as rapidly and efficiently as turtles on a farm.
Rules
A look at the turtles trading rules
The ‘turtles’ of Dennis had to employ the following rules if they were going to succeed as traders.
The trading markets rule
First, there was a rule about trading markets. Turtles, therefore, did not have the option of trading futures contracts. Instead, they were required to find liquid markets and trade futures contracts. This would allow them to trade without causing the market to jump higher in the absence of large orders.
Position-sized rule
The turtles in this rule utilized a position-sizing algorithm. The algorithm adjusted the trade size in response to the market’s dollar volatility to normalize the positions’ volatility in dollars. A rule like this enables diversification and ensures that all positions are equal regardless of the market.
The entries rule
The third rule was titled the entries rule, and there were two different entry methods with his students. First, the high or low for the 20 days was used as an entry method. However, the second method used a 55-day breakout.
Turtles were required to ensure that the signals were taken since missing one sign could lose a big winner and affect their overall returns.
The stop-loss rule
The turtles learned how to use stop-losses from Dennis, who taught them to use them continually to ensure that no losses were ever too significant. A stop loss is an element of risk management that traders need to determine before entering a position.
The exit rule
Specifically, this rule looked at exits. It’s uncommon for trend-following traders to make the mistake of exiting their position too early, which genuinely limits their potential profitability. The turtles were taught to take many trades, but they were shown that only a few could be very successful while most of the others resulted in losses.
The tactics rule
According to the turtle trading system, the final rule was tactics. By following this rule, the turtles learned some specifics about how limit orders work and how to deal with fast-moving markets.
Furthermore, they learned to wait patiently before putting in orders, rather than rushing in and attempting to get the best possible trading price.
Dennis also showed them how to profit from momentum by buying the most robust markets and selling the weakest ones.
Bottom line
The turtle trading experiment certainly provides vital information, even if mixed results. Many traders cannot separate facts and sentiment but become highly proficient traders.
