Imagine a technically-driven futures trading system with a big reputation where traders are told to expect up to 70 per cent of their decisions to be wrong. At the same time, an extremely basic system where the principal consideration is changes in price and the main aim and challenge is to identify a clear price trend - up or down - and then stick with it in a disciplined way.
The system is the quaintly named Turtle method, a technique that attracted a better than fair share of US media attention during the late 1980s and early 1990s as a whiz bang way of training successful commodity traders. Turtle trading and its founders get three chapters in the best-selling Market Wizards financial books.
The Turtle system, claims Russell Sands - one of the original Turtles, is a very straightforward way of trading futures and currencies. While it can be used to trade shares, it works better on securities that are more likely to exhibit trend-like behavior.
One of the important features of Turtle is it makes no attempt to anticipate markets. "When we go with a trend, we have absolutely no idea how long it will last or how far it will go," says Sands, a protégé of the system's creators, countrymen Richard Dennis and William Eckhardt. Turtle traders start with the basic assumption that markets follow trends. The principal requirement before there is any trading action is that the trend must be firmly in place.
If prices go up for 20 days in a row, for instance, that signals the start of an up trend. The end of the up trend comes when prices reverse for 10 days in a row.
The big thing about the method, says Sands, is that Turtle traders - if they play the game properly - never enter a market too early and never pick the bottom. Prices have to rise for a reasonable period and build up some momentum before any action is justified. Equally, they must clearly show they are on the way down before a position is closed out.
But once a position is taken, it stays in place until the criteria are met for a trend reversal. It therefore takes a certain amount of opposite price movement before a trader quits a position.
The same rules apply for short positions. Sands says he took a sold position in August gold futures about three weeks ago after the price had retreated for the requisite number of days. The gold price when he acted was $US395 an ounce and he expects to stay with the downtrend until the market rallies for, say, 10 days in a row or he is stopped out by sharp movements.
Turtle trading also incorporates price-related stop losses as part of the overall money management strategy.
These rules relate activity to a trader's resources and strive to discourage overtrading. There are other guides that suggest how profitable positions can be enhanced by expanding a position using unrealized profits.
The biggest trap for futures traders, says Sands, is overtrading. An important part of the Turtle method is putting this into context in terms of market psychology and trading behavior and defining the probabilities of overall ruin due to over-exposure.
The Turtle system argues that if traders wish to stay in the game for the long haul they should try to risk no more than 2 per cent of their total funds at any one time. This means having enough in the way of financial resources to make worthwhile trades but also stay in the game. "Running a $20,000 trading account and then trading five or 10 gold contracts on this is suicidal behavior," says Sands. His personal method is to trade one contract for every $30,000 of capital. Although markets can be traded with less capital, it increases the risk of being wiped out.
An extreme example is a gold trader with a $5,000 account. With such a small amount, setting a stop loss at 2 per cent of account size is obviously uneconomical as it represents scope for just a $1 price move.
If the gold price is given $5 to move, the money at risk in a 100-ounce contract is $500, or 10 per cent of total funds. But someone with $30,000 will be risking less than 2 per cent of their total funds. The same small trader will, of course, make a more impressive profit if he wins. But then, however, trading becomes more of a function of courage rather than a discipline.
"Obviously the bigger risk you take when you trade, the bigger the reward if you're right. But equally, the smaller you trade, the less chance you will go bust," says Sands. The Turtle philosophy is to trade many times as small as possible in order to stay trading forever. This is important, says Sands, because 60 to 70 per cent of the time the identified trends fizzle out and traders wind up losing a small amount of money. The compensation comes when a solid trend is identified which rewards the trader handsomely. "Maybe 30 per cent of the time you are right and when I win with Turtle I can make between five to 10 times what I've previously lost," claims Sands.
