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It pays to be a turtle in the stock market, sometimes

How would you feel if someone gave you a million dollars to trade, and taught you all the rules of trading before that?

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Good traders are made, not born, writes Michael W Covel

MUMBAI: How would you feel if someone gave you a million dollars to trade, and taught you all the rules of trading before that? I can already see people turning around to ask, “Is that some sort of a joke?”

But, that’s precisely what happened in Chicago, sometime in the early ‘80s. Richard Dennis, the reigning trader king of Chicago wanted to settle a decade-long debate with his partner William Eckhardt — was it nature or nurture that mattered when it came to being a successful trader. Were good trading skills inborn or could they be taught?
As Michael W Covel writes in the The Complete Turtle Trader, The Legend, the Lessons, the Results, “One of these arguments was whether the skills of a successful trader could be reduced to a set of rules... Or whether there was something ineffable, mystical, subjective, or intuitive that made someone a good trader.”

Dennis and Eckhardt decided to settle their debate once for all. An advertisement was put out, inviting applications. “Mr Dennis and his associates will train a small group of applicants in his proprietary trading concepts. Successful candidates will then trade solely for Mr. Dennis. Prior experience in trading will be considered, but is not necessary,” ran the advertisement. Interviews were held and people were hired. And the entire group was known as Turtles.

But why the name Turtles? “It was simply the nickname Dennis used for his students. He had been on a trip to Singapore and visited a turtle-breeding farm. A huge vat of squirming turtles inspired him to say, “We are going to grow traders just like they grow turtles in Singapore,” writes Coven. The Turtles were then trained for two weeks. After training, each was given a million dollars to start trading on the basis of what he/she had learnt.Coven writes, “Dennis and Eckhardt taught their students everything they needed in only two weeks to trade bonds, currencies, corn, oil, stocks, and all other markets... Each student received $1 million to trade after his classroom instruction.”

“The Turtles were trained to be trend-following traders. In a nutshell, that meant that they needed a “trend” to make money. Trend followers always wait for a market to move; then they follow it. Capturing the majority of a trend, up or down, for profit is the goal,” writes Coven. In other words, the Turtles had been trained to buy when the market was on its way up or as it became more expensive and short-sell when the market was falling. This clearly went against the conventional Wall Street wisdom of buying low and selling high. “What Dennis and Eckhardt were teaching was the exact opposite of Warren Buffett’s buying “value.””But that is easier said than done. How do you know whether a market is on its way up or down? Here is where the trading rules that Dennis and Eckhardt had developed over the years came in. The Turtles had to wait for breakouts to happen.

“If a market made a new four-week high, the Turtles would buy. They would exit if/when it made a two-week low,” writes Coven. This, along with a few other rules and filters, became the Holy Grail for the Turtles.  It was important for them to have emotions under control and follow the rules. “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.” 

The other important thing was that the Turtles just traded numbers. As Tom Willis, Richard Dennis’s protégé says in the book, “ They don’t know anything about bonds. They don’t know anything about currencies...They are just numbers. Corn is a little different than bonds, but not different enough that I’d have to trade them differently. Some of these guys I read about have a different system for each [market]. That’s absurd. We’re trading mob psychology. We’re not trading corns, soybeans, or S&P’s. We’re trading numbers.”

This experiment went on till 1988, when Dennis pulled the plug on it. Most of the Turtles, while they traded for Dennis, did very well for him and themselves. Out on their own, though, the world was a totally different place. Some of them could not keep up with their initial performance and faded into mediocrity. But, others have kept the flag flying and made good money for their clients and themselves over the years.

k_vivek@dnaindia.net

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