Let me take you through something incredible that, believe it or not, actually involves some reptiles—though not in the way you might think. Picture this: the 1980s, two commodities traders, Richard Dennis and William Eckhardt, developed a unique trading strategy that ended up transforming the landscape of commodity futures trading. Dennis believed that trading could be taught, while Eckhardt thought it required innate talent. To settle their debate, they conducted an experiment by training a group of novices, later known as the Turtles. They were trained over a period of just two weeks, and these novices ended up making over $100 million in profits within a year. How crazy is that? If you think about it in terms of efficiency, that’s like accelerating from zero to hero in record time!
Diving a bit deeper, their method revolved around breakout trading. A breakout occurs when the price of a commodity moves beyond a predefined resistance or support level after trading within a range for a specified period. The Turtles used 20-day and 55-day breakouts as their core strategy components. Think about that: they identified entry points based on how prices behaved over these distinct periods. Talk about using time to your advantage! They bought when prices broke above a certain level and sold when they broke below. Simple, right?
They weren't just throwing darts at a board, though. Position sizing and risk management were key elements of their approach. Turtles would risk a maximum of 2% of their account on any single trade. Imagine having a $10,000 account—this means at most, you'd risk $200 on a trade. It was a calculated risk, considering volatility and current market conditions. The ATR (Average True Range) played a critical role here by helping to gauge market volatility. Ever heard the saying, “Risk management is more important than the trade itself?” That’s what these guys lived by.
Interestingly enough, the concept of ATR was popularized by J. Welles Wilder in his 1978 book "New Concepts in Technical Trading Systems". Wilder's method of smoothing out price variations over a period helped the Turtles manage their trades better. One look at historical data, and you’ll see that markets can be unpredictable. It’s not the number of wins that counts but the ratio of average win size to average loss size. These traders shrank losses and let their winners run. Imagine pulling this off in today's fast-paced markets driven by high-frequency trading algorithms. Efficiency remains the name of the game, whether it’s the 1980s or present-day trading floors.
They didn’t stop at just identifying breakouts and managing risk, though. The original group had ten core Turtles who were able to generate returns averaging 80% per annum during their first five years. That blow-your-mind 80% return is a testament to the system's power. If you were to put that into historical context, Yale University’s endowment fund averaged around 11.6% annually during the same period. These rookies were killing it compared to some professional investment funds.
Another fascinating aspect was the diversity in the markets they traded. Over 20 commodities, including gold, crude oil, and S&P 500 futures. This diversification helped minimize risks and seize profitable opportunities across a range of assets. If one market was down, chances are another was up. Think about it; they were always in the right place at the right time to catch any potential profit wave. If Dennis and Eckhardt were around today, I bet they would have been prime candidates for running a top hedge fund.
The Turtles were also disciplined in following their rules, a trait that’s echoed by many successful traders and institutions today. For instance, JPMorgan's trading desk also heavily emphasizes disciplined, rule-based trading in today's complex financial markets. When you’re dealing with millions or even billions, deviating from tested and true strategies is a no-go. Professional traders stick to their guns because they know the market can be ruthless.
And don’t even get me started on slippage—the difference between the expected price of a trade and the actual executed price. The Turtles had to deal with slippage and commissions, which could eat into profits. Dennis and his crew understood that slippage was an inevitable cost but mitigated it through careful position sizing and selective market entry. For them, controlling trading costs was as essential as bagging large wins.
Years later, this strategy is still revered, and many modern trading systems owe their roots to it. Today you might find sophisticated software and algorithms doing the heavy lifting, but the principles remain unchanged. Even brokers like TD Ameritrade and Fidelity offer tools and resources embedded within their trading platforms to emulate such rule-based strategies.
It's amazing to see how a bet between two traders culminated in a strategy that's still discussed and implemented today. The nature of trading has evolved with the advent of technology and globalization, but some truths remain constant. If you're intrigued and want to dive deeper, you might want to check out this unmissable resource on the Turtle Trading Strategy.
The turtle experiment stands as a testament to disciplined trading, proper risk management, and the profound impact of mentorship. It reaffirms that in trading, and perhaps in life, sticking to well-established principles can yield extraordinary results. Those guys were the epitome of sticking to what works, iterating based on data, and keeping emotions out of it. If that’s not inspiring, I don't know what is.