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Selected Materials from Book - The Complete Turtle Trader by Michael W. Covel

The Complete Turtle Trader by Michael W. Covel June 19, 2008

This book is an insight to one of the technical strategies, which was taught to a small group of students, turtles, in the mid 1980s, who were selected not based on experience or education in finance but as result on their interview and interview tests that focused more on IQs, logic, and personal investment attitude. The hiring itself was an experiment between two traders and partners at C&D Commodities, Richard Dennis and William Eckhardt, to settle their life-long debate on whether trading can be taught. As the record showed from 1984 to 1988 the average turtle performance was well above the benchmark and proved Richard Dennis original argument that trading can be taught.

Ironically, as it turned out, a number of students had outperformed Richard Dennis after the program had disbanded. Richard Dennis himself had to “retired” from the trading game as his own performance had deteriorated dramatically. Yet after seeing the success of his former students, Richard re-entered the game, only find himself re-retire soon after.

There seem to be two popular writings on this subject of turtle trading: this book, with the second-handed materials derived mostly through interviews and researches and the other book, The Way of Turtle, by Curtis Faith, who was actually one of the students, in fact he was the student, perhaps favored by Richard Dennis, and handled the largest portion of the capitals. His performance was arguably the best among all turtles. His book are more first-hand and seem to be more suitable to readers with strong technical interests.

This book with majority of the content focuses on the storytelling: the beginning, the process, the result, and the thereafter.

The general turtle strategy is basically trend following, with these common philosophies:

1. “cut the loss, the let the profit run” “If beans are up 10 cents and corn is down five cents, we buy beans. Some people think to buy corn because it’s going to catch up with beans, we take the opposite. We’d rather buy the commodity that’s strongest and sell the one that’s weakest.”

2. “to buy or sell short markets that are in motion, moving up or down, because markets in motion tent to stay in motion” “Trend trading thrives on that overconfidence.”

3. “better to risk taking many small losses than to risk missing one large profit.”

4. Use “breakouts” and “break through” as signals for buys.

The turtles learned two systems, S1 and S2. S1: “S1 used a four week price breakout for entry and a two-week price breakout in the opposite direction of the entry breakout for an exit.” S2: “S2 was the Turtle’s longer-term trading system. It used an eleven-week breakout for an entry signal and a four-week breakout in the opposite direction for an exit.”

In addition to the two general systems, there were rules that explicit enforced on the turtle. These rules were general designed to regulate trader’s emotions. “To follow the good principles and not let fear, greed and hope interfere with your trading is tough.”

“Turtle learned that the most important thing was to have a sound trading approach tested in the real world.”

Market Vendetta: to recovery the loss in the same market and on the same position.

“The importance of using less leverage to appeal to investors.” “In general, high returns do not attract as much money from investors as low-volatility trading.”

“mean reversion”: revert to the mean, the convergence theory, converge to the moving average. Parker consider this as a “fatal strategy of trading the market.”

Brokerage firm are perfect partner to fund manager as benefit from their ability to sell to public (maybe also raise capital?)

Turtle Jim DiMaria: on allocate money across a wide group of traders “The biggest single problem with these allocators is they completely confuse volatility and standard deviation with ‘risk’. The two are complete noncorrelated.”

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