This book tells the story of a great experiment by a legendary trader. That trader was Richard Dennis, an unlikely champion of the trading floor. Unlike the typical trader, Dennis didn’t come from a connected or privileged background. He grew up on the south side of Chicago, an area noted for crime and poverty.
Yet, by age 25, Richard Dennis managed to earn $1 million in the market. By age 37, he’d made $200 million. Where did the ability to do that come from? Was it genetic? He and his partner, William Eckhardt, debated on this question. Eckhardt said it was genetic, Dennis maintained it could be learned.
That debate led to the experiment that this book is about. The experiment involved recruiting people from diverse backgrounds, teaching them the system Dennis used, giving them funds to invest, and seeing what would happen. The name “Turtles” came about during a trip to Singapore. Richard Dennis was visiting a turtle farm and remarked, “We are going to grow traders just like they grow turtles in Singapore.”
The interesting chapters 4,5 and 6 explain the trading method that the Turtles used. First you should have an expectation as to what can you earn on each trade on average over the long run from your investing decision. This is based on a formula :
E= (PW * AW) – (PL * AL)
E = Expectation or Edge
PW = Winning Percent
AW = Average Winner
PL = Losing Percent
AL = Average Loser
It didn’t necessarily matter how little the Turtles lost on any individual trade, but they needed to know how much they could lose in their whole portfolio. The important thing is to limit portfolio risk. The trades will take care of themselves.
Trade Tip 1 : You need to calculate your edge for every trading decision you made because you can’t make “bets” if you don’t know your edge.
Trade Tip 2 : Use price as a primary decision making tool.
Trade Tip 3 : You need to be comfortable “shorting” a market. You have to relish the opportunity to make money in a decreasing market.
Trade Tip 4 : Price “breakout” was Turtle jargon to describe a market that had just made a new high or a new low over “x” period. The selection of these values for your trading will always be subjective. Test or practise these rules on paper or on trading software to gain confidence.
Trade Tip 5 : Feel free to experiment on breakout lengths. Do not fixate on specific values. Accept a breakout value and stick with it consistently.
Trade Tip 6 : Stop worrying about how you enter a trade. The key is to know at all times when you will exit.
Trade Tip 7 : You can determine the average true range for any stock or futures contract. Determine on an average of 15. Turtle risk management starts with the measurement of daily market volatility. The Turtles were taught to measure volatility in terms of daily ranges. It was nicknamed “N”, also known as Average True Range or ATR.
How to derive “N”?
1. The distance from today’s high to today’s low
2. The distance from yesterday’s close to today’s high
3. The distance from yesterday’s close to today’s low.
Trade Tip 8 : Take your account (whatever size it is) and multiply by 2%. For example,a $100K account would risk 2% or $2000 per trade. It is always better to bet a small amount initially on any trade in case you are wrong – which can easily be greater than 50% of the time.
Trade Tip 9 : If you are trading Google stock and its ATR is 20. A 2ATR (2N) stop would be 50. If you lose 40 points on Google, you must exit, no questions asked. So stick to your exit point.
You can check out http://www.turtletrader.com for more information.