Is it possible to learn what it takes to be a great trader or are traders born and possess innate abilities?
This is an important question to answer. After all, if it is impossible to acquire the skills necessary to be a great trader why invest all the time trying to improve? Why not admit that its pointless and that only a selected group of individuals is able to generate above average returns?
Micheal Covel´s book “The Complete Turtle Trader – The Legends, The Lessons, The Results” tells the story of the Turtle experiment, an experiment designed in order to answer this specific question. Can ordinary people be trained to become great traders?
In the 1980s legendary commodities trend trader Richard Dennis and his colleague William Eckhardt debated this very same question. While Dennis was convinced that it was his system that had made him successful and that anybody could learn to apply it Eckhardt disapproved saying that Dennis´ character had enabled him to succeed. The result of this disagreement was the Turtle experiment. The two men posted an ad in the New York Times saying that they were looking for trainees. They obtained an incredibly diverse group of people with backgrounds ranging from Harvard MBAs to security guards to professional gamblers. After four weeks of being trained by Eckhardt and Dennis himself the trainees were given 1 million dollars each and were to apply the trading rules acquired. The returns are astounding. While not all Turtles have become successful traders the performance of all of them in the first years managing Dennis´ money were impressive. Some of the Turtles continued managing money and have become billionaires in the process. It seems like the experiment proved that nurture beats nature in trading.
But what was it that the turtles learned from Dennis?
The turtles learned to apply a trend following system. They tried to recognize trends and ride them. They did not try to predict the future. Instead of trying to buy low and sell high as conventional wisdom would suggest the goal would be to buy high, selling higher, and to sell short low, covering even lower. This trading activity considerably varied from the the public perception of how traders spend there days. During the trading activities of the turtles days could pass without any trading. Their signals would not be triggered and thus they could not trade. When the trades finally manifested the situation could change completely and launch highly active days. Another aspect of the turtle´s trading system that would not be expected generally is the winning percentage of the trading system – or conventionally said: ” The Turtles were wrong the majority of the time!”. People want to be right all the time. Thus, they want a system with a very high winning rate. However, trend following only guarantees a win rate of about 40%. This means that 60% of your trades will be losers. As a consequence cutting losses, sizing your bets and riding the big winners is of paramount importance.
For their entries the Turtles used two breakout systems. The shorter term system one (S1) indicated an entry by a four week (twenty days) break-out of the price. The position would be exited in case of a two weak break-out (10 days) of the opposite direction. These signals would be used for both long and short positions. For system one (S1) there was a filter however. The Turtles would not take the entry if the last breakout generated a winner. If the trade before the breakout was a loser the entry would be taken.If this made them skip an entry and the market would continue to trend system (S2) two could be used. This used a eleven weeks (55 days) break-out for entry signals and a four weeks breakout of the opposite site as a exit signal.
But the entries were not that important. What was important is risk management and knowing when to exit. For that a measure of volatility – N- was conceptualized. N would be the average trading range (ATR) of the last twenty days. This was an important measure because it would allow the Turtles to buy more contracts of less volatile commodities and invest less in more volatile commodities. On each trade only 2% of trading capital would be risked which was equal to 2N – thus 2N would be the stop loss of each trade as well. If the trader would trade an account of 100000€. Buying apple breaking out at 100€ with an ATR of 8 the number of stocks that could be bought would be 100000*0.02 / 2*8 = 125 with a maximum draw-down of 2000€.
These were the main rules the turtles were following allowing them to achieve incredible returns. As Dennis said it is not the rules that makes a good trader. What is difficult is to stick to ones rules when the own account is down 50%. In this situation it is easy to abandon the own rules and give up. But being disciplined in these markets is what makes great traders.