The Complete TurtleTrader: How 23 Novice Investors Became Overnight Millionaires
2 Prince of the Pit
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“Great investors conceptualize problems differently than other investors. These investors don’t succeed by accessing better information; they succeed by using the information differently than others.”
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Trading has taught me not to take the conventional wisdom for granted. What money I made in trading is testimony to the fact that the majority is wrong a lot of the time. The vast majority is wrong even more of the time. I’ve learned that markets, which are often just mad crowds, are often irrational; when emotionally overwrought, they’re almost always wrong.
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You can’t have a standard attitude about money and do well in this business. What do I mean by that? Well, my father, for instance, worked for the city of Chicago for 30 years,
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and he once had a job shoveling coal. So, just imagine coming from his frame of reference, and thinking about losing $ 50 in a few seconds trading commodities. To him, that means another eight hours shoveling coal. That’s a standard attitude about money. 9
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Not only was his persona different, his trading was different. Dennis read Psychology Today (no government economic or crop reports for him) to keep his emotions in check and to remind him of how overrated intuition was in trading.
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Quite simply, his trading technique was to trade seasonal spreads. In other words, he wanted to take advantage of seasonal patterns in markets like
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soybeans—his initial specialty. Dennis would hold “long” (bets to profit as the market increased) and “short” (bets to profit as the market decreased) positions in futures contracts simultaneously in the same or related futures markets.
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“I think it’s far more important to know what Freud thinks about death wishes than what Milton Friedman thinks about deficit spending.”
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Dennis told Willis, “If you’re buying wheat and it’s strong and the beans are too low and the wheat is five higher, why don’t you sell soybeans instead of selling the wheat you bought?” It was a very sophisticated insight.
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In fact, buying “strength” and selling “weakness” short still befuddles investors. It is counter-intuitive to buying low and selling high.
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Money for Dennis was just a way to keep score in the game. He was frank about it: “Trading is a little bit like hitting a ball. If you’re thinking what your batting average should be, you’re not concentrating on the right thing when you bat the ball. Dollars are the batting average of the trader.”
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“Rich is probably the greatest trigger puller that I personally have ever known: he has the ability under tremendous pressure to stand there with his own money and pull the trigger when other people wilted. And when he was wrong, he could turn on a dime. That’s amazing—that’s not trading, that’s genetic.”
3 The Turtles
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Those who worked to systematize things had an advantage.
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They were trying to assess the applicants’ ability to think in terms of odds
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Vegas. And they wanted applicants with the emotional and psychological makeup to treat money abstractly so they could focus on how to use it as a tool to make tons more. More than anything, Dennis was interested
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egos. None of the chosen few ever would have wanted
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Berkeley’s book Hylas and Philonous.
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Dennis was looking for was the ability to suspend your belief in reality.
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Eckhardt was signaling that their trading strategy relied upon the idea that if you were tossing dice, a string of 6 sixes in a row happens more often than people know or expect.
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In other words, Eckhardt was saying that they were not mean reversion traders. Mean reversion traders make bets that markets stay in tight ranges and that if they veer out of the range, they typically revert to the average or mean. He was saying in plain terms that markets trend, and those trends come unexpectedly.
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Disassociating the dollars from the trading was a huge part of what was instilled in the Turtles.
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The successful trader is the one who codifies, the one who turns things into rules. Every idea that’s market-worthy must then be tested.”
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That is not to say losses are easy to accept, but Dennis and Eckhardt taught the Turtles not to consider their trading in terms of amounts of money. They wanted them to think of money as a variable, because in that way, regardless of account size, they could make the correct trading decisions at all times.
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However, first and foremost Dennis and Eckhardt wanted the Turtles to understand that their kind of speculation had virtually no external limits. It took place in a limitless environment. They could bet any amount on any potential market movement at any time, but if the Turtles entered this no-limit environment and didn’t protect their scarce capital, then sooner or later the probabilities would catch up with them.
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classroom solved the dilemma of “speculation.” Since the markets are a zero-sum game, the Turtles learned that even a marginally profitable trader must win money from other market players. By definition, they must use different methods than everyone else in the game. 19 What this means is that only when “good” trades, not necessarily profitable trades, are consistently made over the long run, the chances of profitable results increase dramatically. A bad month, a bad quarter, or even a bad year does not mean much in the grand scheme. The Turtles learned that the most important thing was to have a sound trading
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approach tested in the real world. 20
4 The Philosophy
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Define the question. Gather information and resources. Form hypothesis. Perform experiment and collect data. Analyze data. Interpret data and draw conclusions that serve as a starting point for new hypotheses. Publish results.
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Daniel Kahneman would win a Nobel Prize for “prospect theory” (behavioral finance),
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“When the price moves above the high of two previous calendar weeks (the optimum number of weeks varies by commodity), cover your short positions and buy. When the price breaks below the low of the two previous calendar weeks, liquidate your long position and sell short.” 9
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“Abstractions like crop size, unemployment, and inflation are mere metaphysics to the trader. They don’t help you predict prices, and they may not even explain past market action.” 12 The greatest
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“You don’t get any profit from fundamental analysis. You get profit from buying and selling. So why stick with the appearance when you can go right to the reality of price?”
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“Do not let emotions fluctuate with the up and down of your capital.” “Be consistent and even-tempered.” “Judge yourself not by the outcome, but by your process.” “Know what you are going to do when the market does what it is going to do.” “Every now and then the impossible can and will happen.” “Know each day what your plan and your contingencies are for the next day.” “What can I win and what can I lose? What are probabilities of either happening?”
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What is the state of the market? What is the volatility of the market? What is the equity being traded? What is the system or the trading orientation? What is the risk aversion of the trader or client?
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In essence Eckhardt was saying, “You are not special. You are not smarter than the market. So follow the rules. Whoever you are and however much brains you have, it doesn’t make a hill of beans’ difference. Because if you’re facing the same issues and if you’ve got the same constraints, you must follow the rules.”
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“To follow the good principles and not let fear, greed and hope interfere with your trading is tough. You’re swimming upstream against human nature.”
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Eckhardt was stern about the mistake losing traders make when they look backward in time. The losing trader is trying to make money back in the same market and on the same position. Eckhardt described it as a “market vendetta.”
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The Turtles were taught not to fixate on what particular market made money that month or year or what market lost money. They learned to be agnostic and accept whatever trending market created opportunity.
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For example, when the Turtles were taught that they had to exit with a small loss, because they don’t know how far it could drop, they got out. What they didn’t want to do was look at the initial small loss and say, “I had $ 100,000 of Microsoft and now I have $ 90,000, so I’m going to put another $ 10,000 of my money into MSFT because now it’s cheap.” Dennis said that to add to a losing position was like being the kid who’s been burned on a hot stove once already but puts his hand back on the stove just to prove it was the stove that was wrong. 26 However, that said, if after taking a small loss the Turtles got a signal to get into the market again, they got back in. An example using legendary hedge-fund manager Paul Tudor Jones best explains the point. In one of Jones’s best trades, he got an entry signal. He got in. The trade went against him and he lost 2 percent, forcing him to get out. All of a sudden, the entry signal came right back as the market moved in his favor again. He could not debate it. He had to get back in. Then it went against him again for another 2 percent loss, forcing him to get out again. He went through this process ten or so times in a row until he got a position that actually kept trending. That final big trend made enough money to pay for all those false starts and then some, but to get there in the first place he had to follow his rules religiously. The same lesson is seen in sports. Even though Larry Bird was one of the best basketball
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The Turtles were taught not to fixate on when they entered a market. They were taught to worry about when they will exit.
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Pretend again there are two traders, John and Mary. They are exactly the same except in the amount of trading capital each of them has. Assume John has 10 percent less money, but enters a trade before Mary. By the time Mary gets in her trade, they both have the same amount of money. Eckhardt clarified, “What this means is that once an initiation is made, it should not matter at all to subsequent decisions what the initiation price was.” He wanted the Turtles to literally trade as though they didn’t know what their entry price was. 27
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Dennis kept bringing his teachings back to losses “The trader who is averse to losses is in the wrong business.” 28 The “secret” was what he did with the wrong positions, not with the right ones. 29 Managing the losing trades (what Dennis called the “wrong positions”) allowed traders to wait for the right ones (big trends). This is why the entry price was only so important.
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buying “value.” The Turtles were supposed to say, “I want to buy or sell short markets that are in motion, moving up or down, because markets in motion tend to stay in motion.” If markets are moving higher, that’s a good thing. If markets are moving lower, that’s a good thing, too. Dennis and Eckhardt wanted the Turtles to profit from both.
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Dennis was pushing his students go against basic human nature. He said, “The single hardest thing I have to do to make people understand how I trade is to convince them how wrong I can be about things, how much of a guess it is. They think that there’s some magic involved and that it’s not just trial and error.” 30
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C& D’s trading inspired a great deal of mystification, but in reality they were a mass merchandiser who sold 90 percent of their products as loss leaders so they could make a gigantic profit on the remaining 10 percent. Sometimes they had to wait a long time for good things to happen. Most people can’t psychologically handle the wait. 31
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Look at this logic from a media company perspective. Like Dennis and Eckhardt, movie producers and publishing executives know they will have “losers.” A movie studio will fund ten movies. A book publisher will fund ten books. In both cases, the producers or publishers often have no idea which one exactly of the ten is going be successful. In fact, they might be lucky if one of the ten is successful. Since they don’t know which one is going be successful, they still have to fund all ten. If nine of those books aren’t successful, well, the publisher is only going to print a small batch to begin with—that equals a small loss. If those movies or books don’t do well, fine. They’re done. The companies cut their losses and get out. However, the movie or book that does really well, the tenth one, pays for the losses from the nine losers. The Turtles were taught to think of themselves as the publisher, the movie studio, or the casino “house.”
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Don’t try to predict how long a trend either up or down will last. It is impossible. Eckhardt gave the Turtles an example of a market moving rapidly through the point where they were supposed to buy, but for whatever reason had missed. Now they are sitting there waiting for a “retracement.” While they wait for the cheap place to buy, the market keeps racing higher and higher. Eckhardt said there was “a great temptation to reason that now it’s too high to buy. If you buy it now you’ll have an initiation price that’s too high. However, it is imperative that you make this trade. The initiation price simply won’t have the kind of significance you suppose it will have after the trade is made.” 32 The Turtles were not to wait for a retracement. There was no statistical justification to think like that. If they were trading soybeans at $ 8.00 and they went to $ 9.00, the Turtles were taught to buy them at $ 9.00 rather than
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How would the Turtles have acted if they’d received a buy signal for Google for the first time at $ 500? They would buy. Get on board now was the thinking. Dennis always came back to the scientific method, saying that when you have a position, you put it on for a reason and you’ve got to keep it on until the reason no longer exists: “You have to have a strategy to trade, know how it works and follow through on it.” 34
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Measuring volatility was critical for the Turtles. Most people then and today ignore it in their trading.
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The question Dennis and Eckhardt always asked was, “How big should you trade based on current volatility?” In other words it’s not so much the current price of a given stock or futures contract that is paramount, but rather knowing at all times the market’s volatility. 36 For example, it’s important to know that Microsoft is at a price level of 40 today, but it’s even more important to know Microsoft’s volatility (“ N”) now so you can buy or sell short the right amount of Microsoft
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Near the end of the breakneck training, Dennis and Eckhardt reiterated the obvious to their newly trained Turtles. The successful students in the class would be the ones who followed the rules and did not deviate. They did not want creative geniuses; It must have been ego-deflating for Turtles once they realized, what Dennis and Eckhardt were looking for was the equivalent of robots.
5 The Rules
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A Type I error, also known as an error of the first kind or a false negative, is the error of rejecting something that should have been accepted. A Type II error, also known as an error of the second kind or a false positive, is the error of accepting something that should have been rejected. 1
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Said another way, they learned that it was better to risk taking many small losses than to risk missing one large profit. The concept of statistical errors was an admission that acknowledged ignorance could be quite beneficial in trading.
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know their edge. A good analogy is being a batter at the plate in a baseball game, as trades and success rates aren’t much different from batters and their averages. Dennis expanded on this: “The average batter hits maybe .280 and the average system might be successful 35 percent of the time.” 4
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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. Eckhardt was clear: “The important thing is to limit portfolio risk. The trades will take care of themselves.” 5
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Trading Your Own Account Tip #1: You need to calculate your edge for every trading decision you make, because you can’t make “bets” if you don’t know your edge. It’s not about the frequency of how correct you are; it’s about the magnitude of how correct you are.
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Everyone wants to know, “How do you know when to buy?” The Turtles were taught to enter trades via “breakouts.” A breakout occurs when a market—any market (Cisco, gold, yen, etc.)—“ breaks through” a recent high or low. If a stock or futures contract made a fifty-five-day breakout to the upside (long), meaning that its current price was the highest price of the last fifty-five days, Turtles would buy.
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Now that the concept of using price for your decision-making is clear, stop watching TV! Stop looking at financial news. Start keeping track of the open, high, low, and close of each market you are tracking. That is the key data you need to make all of your trading decisions.
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The Turtles learned two breakout variants or “systems.” System One (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. If a market made a new four-week high, the Turtles would buy. They would exit if/ when it made a two-week low. A two-week low was a ten-day breakout—counting trading days only.
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terms: “First, you use channel breakout theory with a couple of filters. Second, you are going to size your bet by volatility. Third, you are going to have two hard stops on every trade. You are going to have the natural liquidation and you are going to have the firm hard stop. That’s what saved everybody. Rich’s systems inherently said, ‘You got to stay in the game all the time as you never know when trends are going to
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Stop worrying only about how you enter a trade. The key is to know at all times when you will exit.
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You can determine the average true range for any stock or futures contract. Simply take the last fifteen true ranges, add them up, and divide by 15. Repeat each day, dropping off the oldest true range. Many software packages will do this automatically.
11 Seizing Opportunity
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Nonconformists—lower need to conform indicating self-reliance. Emotionally aloof—not necessarily cold to others, but can be oblivious. Sky divers—lower concern for physical harm, but does change with age. Risk takers —more comfortable taking it. Socially adroit—more persuasive. Autonomous—higher need for independence. Change seekers —like novel approaches. This is different than 99% of all other people.
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Energetic—higher need and / or ability to work longer. Self-sufficient—don’t need as much sympathy or reassurance, but they still need to form networks so self-sufficiency need not be taken to extremes. 8