Turtle Rules: Discipline and Consistency in Trading

One of my favorite books to recommend to newbie investors is Jack Schwagers Market Wizards.

The reaction after reading it is invariably the same: "Yeah, that was interesting, but it didn’t teach me about trading _____."

It wasn’t supposed to. You should learn that trading any asset — stocks, bonds, currencies, futures, options, indices, currencies, whatever —  involves rules of discipline, risk management, structural planning, anticipating losses, implementation.

One of the original Market Wizards was Richard Dennis. He had been to a huge turtle farm in Singapore, where 100s of 1,000s of the little creatures were being raised in vast tanks. He wanted to know if traders could be trained — raised — the same way (hence the name, Turtle traders).

In a scene reminscent of Trading Places, Dennis made a bet with his partner, William Eckhardt over whether Turtles Traders could be "farm raised:"

Can the skills of a successful trader be learned? Or are they innate, some sort of sixth sense a lucky few are born with? Richard Dennis, the legendary Chicago trader, who turned a grubstake of $400 into $200 million in 18 years, has no doubt. Following an experiment with a group of would-be traders recruited from around the country, he’s convinced trading can be learned. Over the past 1 1/2 years, a group of 14 traders he taught earned an average annual compound rate of return of 80%. In contrast, about 70% of all non-professional traders lose money on a yearly basis.

Trading was even more teachable than I imagined, he says. In a strange sort of way, it was almost humbling. Mr. Dennis says he debated the learning vs. innate ability question with some of his associates for years. While they argued that his skills are ineffable, mystical, subjective or intuitive, he says his own answer was far simpler. The 40-year-old Mr. Dennis attributes his success to several trading methods he developed, and, perhaps more important, the discipline to follow those methods. To prove his point, Mr. Dennis decided to run a real life experiment. In late 1983 and again in 1984, he placed ads in the Wall Street Journal, Barron’s and the New York Times seeking people who wanted to be trained as traders. The job required that they move to Chicago, where they would receive a small salary and a percentage of any profits while Mr. Dennis taught them his methods.   -Wall Street Journal Article

Dennis used what was essentially a Trend Following system. Trend is an important component of my own methodology — but its one of several factors.

A fascinating aspect of the Turtles was that, int he beginning years, they became extremely protective of their methodology. Eventually, the "secret" leaked out, websites began to sell it, it became widely distributed. (Its a mechanical system, and many people find that difficult to follow.)

Today, all of the Turtles rules are available on line — for free. They are also the primary source of the book Trend Following.

You can download the Turtle Rules at the links below. (Here’s a pdf in case there are bandwidth issues).

Download turtlerules.pdf

>

Sources:
Turtle Rules
http://www.originalturtles.org/docs/turtlerules.pdf

Turtle Trading is Trend Following: Learn Pros, Cons and Myths
http://www.originalturtles.org/system.htm

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  1. Andy Nardone commented on May 15

    As Dennis himself commented (I think??), he could publish the rules in the newspaper and even then only a select few could make money using them.

    It all comes back to discipline and very, very few of us have it over the long term. In short bursts sure, many us do. But over the long term it’s only a select few. Fortunately, in most aspects of our lives the immediate impact of the lack of discipline isn’t too bad – – maybe a few extra pounds around the gut or something along those lines.

    But in trading there is no such luck. The minute you let your guard down, disregarding a stop as opposed to wolfing down a late night glazed donut, it’s game over.

    I am fascinated by unwavering discipline in all aspects of life.

  2. dsquared commented on May 18

    MAJOR health warning!!!!!

    In the context of trend following systems, the word “discipline” is usually used in a specialised sense meaning “complete disregard for sensible risk management”!

    The Turtles (and definitely, Dennis himself) are quite notorious for having huge drawdowns that would (quite rightly) be unacceptable to most investors. All this stuff about “have the discipline to stay with the system” means is that if you stick with something, it will come right in the end, unless it doesn’t, in which case nobody will ever hear about you. You can make a doubling-up strategy work on a roulette wheel if you have the “discipline” to stick with it, but that doesn’t make a roulette wheel a good investment.

  3. Michael Covel commented on Feb 16

    My book “The Complete TurtleTrader” (Oct 07) on the subject of the Turtles adds more to the discussion.

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