The Way Of The Turtle

[Bubble Pricker]

I am starting a thread about the trading style described in Curtis M. Faith's book "Way of the Turtle". Other books covering the same subject area include Michael W. Covel's "Complete Turtle Trader" and Van K. Tharp's book "Trade Your Way to Financial Freedom".

The term "Turtle Traders" was coined when trading legend Richard Dennis entered a bet with his long-time friend William Eckardt about whether successful traders were "born" or whether anybody could be trained to be one. Dennis believed anyone can be a successful trader and reportedly said to Eckhardt, upon seeing a turtle farm in Singapore: "We are going to raise traders just like they raise turtles in Singapore."

Turtle-style trading can be boiled down to the following principles:

• Turtle trades make no attempt whatsoever to predict the future market direction in any individual trade. When putting on a trade, Turtle traders have no idea whether the market will go up or down or be flat.
  
• A Turtle trader has identified a set of unequivocal rules, upon which he puts on his trades. These rules leave no room for subjective interpretation. Every time the rules generate a buy/sell signal, the trader will put on the trade, no matter what. Every trade is executed without exception.
  
• The Turtle trader makes money, because his set of rules will, in the long run, give him an edge, meaning that over a large number of trades, he will come out on top.
  
• The size of each trade and money management is determined by certain rules related to current market volatitily.
  

It is important to really and fully understand these principles, because they differ so greatly from the way most people trade:

Most amateur traders follow, broadly spreaking, the following trading style: They watch the markets, analyse charts, consider fundamentals, look at sentiment indicators, read newsletters, discuss with other traders, and then form an opinion as to whether the market will go up or down or move sideways. They then enter a trade position accordingly. At the heart of such a trading strategy lies the attempt to predict the future market movement for each such individual trade. Experienced traders know that their predictions are not always right, so they employ money managent strategies, such as stops or being only long in options to limit their potential losses. Whilst it is possible for some traders (such as Dr.Bubb) to make money in the long term with such a strategy, this is extremely difficult. Why? Because so many subjective factors can get in the way of successful trading in this way. The trader may look at charts, but there is always room for subjective interpretation in chart patterns. The pattern the trader looks for in the charts may be present, but he does not put on the trade, because he "feels" the market is not right or is waiting for a better entry point (and subsequently misses the move). In short, the trader's psychology gets in the way. I will expand on typical psychological errors later when expanding this thread.

Turtle traders have a radically different approach. They accept that they cannot predict the future. This is such an important concept that it cannot be repeated often enough. Here is an excerpt from Curtis M. Faith's book "Way of the Turtle", to ram home the concept:

When my circle of friends learned of my success as a Turtle, they kept asking what direction I thought a particular market would take. everyone assumed that because I was part of a renowned trading group and had made millions trading futures, it must have been because I knew something definitive about the future. My standard response surprised them: "I have no idea."

He had no idea! Turtle traders have no idea where the market is going. This is the most important concept in Turtle trading. Then how can they make money? Because they have a defined set of entry and exit criteria with a statistical edge, and put on the same trade type, over and over again, and again, without any idea whether any one of those trades will be successful or not. All they know is that after a large number of trades, they will be in profit.

It is very hard for traders who have followed the common predictive trading style, to fully understand and abosrb this concept. An example may help. Let's say you are given a crooked coin, which lands slightly more often on tails than on heads. Would you say you can predict the outcome of any individual toss? Of course not. But if you were given a booth at a funfair with this coin and were allowed to legally accept bets from punters, day in, day out, on the outcome of the toss of the coin at even odds for you to win on tails and lose on heads, would you do it? Of course you would. Because you would know that at the end of each day, you would have a profit, as there would always be a slightly higher number of coin tosses landing on tails than on heads. That's the idea of Turtle trading.

I have posted the same thread on GEI where it is a project in progress. Updates and further details on how I will develop my Turtle trading strategy, and discussion, will be posted there.

[waiting_to_exile]

[*]Turtle trades make no attempt whatsoever to predict the future market direction in any individual trade. When putting on a trade, Turtle traders have no idea whether the market will go up or down or be flat.

This is a bit of sophistry. The only way to make money in trading is to have some marginal success in predicting market movements over a given time-frame. The turtle system sounds interesting (although I'm generally put off by the heavy sales pitch that surrounds all the places I've been to look for info), but it is still, as far as I can tell, a predictive mechanism even if the objective is to black-box those predictions and leave the trader ignorant of the the principles in use.

[Bubble Pricker]

This is a bit of sophistry. The only way to make money in trading is to have some marginal success in predicting market movements over a given time-frame.

Yes, that's exactly what the Turtle style trading is about. But the edge is purely statistical. A turtle trade will not make anny attempt to predict the outcome of any individual trade, only the overall outcome of many trades.

The turtle system sounds interesting (although I'm generally put off by the heavy sales pitch that surrounds all the places I've been to look for info), but it is still, as far as I can tell, a predictive mechanism even if the objective is to black-box those predictions and leave the trader ignorant of the the principles in use.

That is not the case for my thread. There are people out there selling black box systems under the Turtle banner. In my sister thread to this one on GEI, I will define in detail the rules for entering and exiting trades.

[Doom Lord]

Yes, that's exactly what the Turtle style trading is about. But the edge is purely statistical. A turtle trade will not make anny attempt to predict the outcome of any individual trade, only the overall outcome of many trades.

That is not the case for my thread. There are people out there selling black box systems under the Turtle banner. In my sister thread to this one on GEI, I will define in detail the rules for entering and exiting trades.

I developing a similar system myself as it suits my goals: I am not interested in doing any sort of research or analysis and I dont want to maintain any sort of database. I guess I just want something for as little effort as possible.

My thinking is that the price can only go up, down or stay the same. It's easy enough to create a set of rules that deal which each of the states so as to make sure you always trading in the right direction (Which I have done). The trick is getting it so that your rules are profitable taking into consideration costs and losses(The bit I am working on). With each trade I know exactly When I am going to enter, what my maximum losses could be, when I am going to make then next trade and the system also tells me when to exit.

To me currency looks the most attractive market as I don't care about anything other than making money so I might as well deal with it, there is practically no regulation, it's the biggest market in the world, you can trade both directions and there is great leverage.

What I dont understand is why any one would trade any other way?

Edited January 18, 2008 by Doom Lord

[Chicken]

There's a lot to commend about the turtle style but the one thing I disagree with is the "statistical edge consistent outperformance" as it is self-defeating. Over the longer term, its success will spawn imitators that will adopt very similar strategies, thereby eroding the edge.

Warren Buffett is one of the best investors the world has ever seen and he has maintained pretty much the same style all the way through. Yes, he has massively outperformed over an extended period but he had a bumpy start early on and was only able to ride it out because he had captive capital.

I rate George Soros higher than Buffett as an investor. His returns have not been as spectacular (although still nothing to sneeze at!) but he has switched styles when it counted. This story may be apocryphal but I heard that during the credit crunch, when the quants were bleeding losses, SAC (a large hedge fund) went complete contrary to their computers (ie sold when their computers told them to buy and vice-versa).

Remember Rocky's fight against Apollo Creed where he switches stance to throw him off? Good movie that one.