Turtle Trading Rules

Chapter 7 Turtle Training Course (1)
Take advantage, manage risk, and be steadfast, plain and simple.The entire Turtle training program, and indeed the foundation of all successful trading, can be boiled down to these four core principles.

Turtle training sessions take place in a conference room at the Union League Club in Chicago.The whole process was full of contradictions from the beginning.Like, we had to wear jackets because the United club had their own dress code, but it didn't fit Richie's personality.He's not the type to fuss over dress codes.Also, I don't know why we chose that particular classroom, but it's just too inappropriate for training.The United Club is your typical gentlemen's club.Its early members included many Chicago dignitaries, such as Philip Danforth Armour, owner of the famous meat company, George Pullman, who invented the luxury rail car, and There was department store tycoon Marshall Field and industrialist John Deere.Picture a room filled with cigar smoke and you get an idea of ​​what the United Club looked like in 1983.The United Club was a world apart from the unassuming offices of C&D Futures.

The first turtle class consisted of 13 of us: 11 men and 13 women. Many of the 24 already had trading experience, but several, including me, were complete newbies.My age is much younger than my classmates.A few trainees look to be in their 30s, but most are at least in their 19s.Even though I was only [-], I felt like one of these brothers and sisters, others whose age and experience didn't make me intimidated.

Before I get into the details of the training, let me tell you a few things about myself that will help you understand how my personality and perspectives affect my learning outcomes.I'm someone who likes to simplify concepts, and I'm good at getting to the heart of something—its essence.During the whole training process, I don't need to make detailed records. What I listen to is the most important concept - the core concept.I pay attention to what is said in class and think about why it is said.I firmly believe that the reason why I can achieve outstanding results in the first month of trading is because I grasped the most important content in the training course.

Both Rich and Bill taught us, and from the beginning, their innovative ideas impressed me.They use scientific methods to analyze the market, pay attention to reasoning, and have a very mature understanding of the principles of successful trading.Rich and Bill never relied on intuition; instead, their method was based on experimentation and investigation.Instead of using all kinds of data, they use computer analysis to determine what works and what doesn't.Their extensive scientific research has given them a special kind of self-confidence that is critical to their success. (It is precisely because of this confidence that Rich dared to bet money that he could train a group of novices to become excellent traders.) First, Rich and Bill talked about the basic principles of gambling and probability theory.I studied probability theory and statistics in high school, so these topics are not new to me.They explained to us the mathematical basis of money management, ruin risk and expected value (all well known gambling concepts).Several of the Turtles had been professional gamblers, so they were already familiar with these fundamentals.I will explore these theories in more detail in later chapters, but for now, I would like to give a brief introduction to the content of the course.

Bankruptcy risk
If you search the internet for the term bankruptcy risk, you will get a lot of results related to gambling and blackjack because the concept is far more prevalent in the gambling world than in the trading industry.However, if a trader wants to decide at a certain moment how many contracts to buy in a certain market, or how many shares of a certain stock to buy, the risk of bankruptcy is his first consideration.

In gambling, ruin risk refers to the possibility of losing all your money as a result of a string of losses.For example, let's say we're playing craps and I say that if you roll a 4, 5, or 6, I'll pay you $1 for every dollar you bet.You're afraid to bet as much as you have, because you have a good chance of winning. The probability of 2, 4 or 5 is 6% because the dice have 50 sides. 6 out of 6 sides will give you money, and the odds are 3 to 2.According to probability theory, if you toss 1 times, you are most likely to win twice and lose twice.If you bet $4 each time, you would make twice and lose twice, netting you $100.

If you only had $1000 in your pocket, how much would you bet each time? $1000, $500, or $100?The problem is that even though the gamble works in your favor, you can still lose money.If you bet too much and lose too many times in a row, you could lose all your money and lose the chance to continue playing.On the first two rolls, you have a 25% chance of losing both, so if you bet $500 each time, you have a 25% risk of going bust on the first two rolls.

One of its most important characteristics is that the risk of bankruptcy increases disproportionately and rapidly as the stakes increase.If you double your bet each time, the risk of bankruptcy generally more than doubles—it may double, triple, or even quadruple, depending on the characteristics of the system.

Money management
The so-called fund management refers to the degree of controlling market risks to ensure that traders can safely survive the unfavorable periods that every trader will inevitably encounter.Traders need to maximize their profit potential while controlling the risk of bankruptcy at an acceptable level. Money management is such an art.

The Turtles used two methods of money management.First, we divide the position into small pieces.In this way, even if a trade loses money, what we lose is only a part of a position.Rich and Bill refer to these small pieces as position units.Second, we use an innovative approach to position sizing developed by Rich and Bill.This approach is based on the market's daily up and down movements, measured in constant dollars.They calculate a specific number of contracts for each market, with the goal of making the absolute volatility of all markets roughly equal.Rich and Bill called their volatility metric N, although people are more used to calling it the average true range (ATR).The name Mean True Range was first coined by J. Welles Wilder in his book New Concepts in Technical Trading Systems.

Since the volume traded in each market is adjusted for the volatility indicator N, the daily range of volatility for any given trade will be more or less the same.The concept of adjusting trading volume (that is, position sizing) for volatility has been written before, most notably in Van Tharp's 1998 book "Road to Freedom in the Financial Kingdom" and the book's 2007 No. second edition.However, this was an absolutely novel concept in 1983.At that time, traders adjusted the size of positions in different markets, mostly based on some less strict subjective standards or the margin requirements of brokers, without much consideration for market volatility.

Turtle Advantage

Since several of the Turtles had no trading experience, Rich and Bill spent a lot of time explaining the mechanics of placing orders and trading.They also emphasized several concepts that were also important to experienced traders, because the amount of money he was going to give us was so large that few in the class had ever traded with an account that large.It is not difficult to trade with a large account, because large orders may cause price fluctuations and increase the cost of transactions.To keep this effect to a minimum, it is very important to manage orders efficiently.

The Turtles learned how to use limit orders instead of the most commonly used market orders.A large market order is bound to result in a price movement.A limit order, sometimes called a better order, refers to buying at a predetermined price or a more favorable price.For example, if you want to buy gold, and the price of gold is currently $540 an ounce, and has been fluctuating between $10 and $538 in the past 542 minutes, then you can place an order like this: "Limit price $539" or " $539 or better."For such a trade, if you had placed a market order, you would most likely get filled at $541 or $542, which is a little higher than $539.In the long run, small savings can turn into big wealth.

The Turtles learned to take a long-term view of trading and mastered an advantageous trading system.It can be said that this is the most important element of the Turtle Law, and it is also the most critical difference between winners and losers in their methods and concepts.

One of the characteristics of long-term effective trading methods is what is called an edge in gambling.This advantage refers to the systematic advantage of a person over an opponent.A casino holds an advantage over patrons most of the time, but in some games it is possible for players to gain an advantage.In the game of blackjack, for example, skilled players gain a temporary advantage over the house when they notice that many low cards have been dealt.Because it means that the probability of a big card being issued next has increased.In this case, the player has an advantage over the dealer—a temporary advantage.Because as long as the combination of cards is less than 21 points, the dealer must continue to ask for cards.And if there are still many big cards left in a deck of cards, then the probability of the dealer losing the next card will increase, because the cards will burst if the points exceed 16.

So, experienced players bet small most of the time because the edge is on the house's side.They're biding their time, waiting for them to stumble upon an advantage over the casino.Once this opportunity arrives, these players will up the ante and use their advantage to overwhelm the dealer.In reality, it is not so easy to do this, because if you start out betting too small and then suddenly increase the bet when the conditions are favorable, you can easily be targeted by the casino and kicked out of the door early.

Because of this, many sophisticated gamblers act in groups.One member of the team sits at the table and plays, watching the cards and giving a cue to the other when the odds shift.So another guy steps up and joins the game, hitting hard from the start.In the evening, the whole team gathers again to share the gains.Such methods work because these professional gamblers use a system that has an advantage.

Rich and Bill also taught us Expected Value Theory, which was designed to give us a solid knowledge base to stick with our approach through inevitable times of adversity.The system we are studying has a strong advantage in the market, and expected value is a way to quantify this advantage, and it is also the knowledge base to avoid the effect of outcome preference.

Recall the outcome preference effect: people tend to judge a decision as good or bad based on its outcomes rather than its quality.The intent of Rich and Bill is clearly to allow us to avoid outcome bias, ignore the individual outcomes of individual transactions, and focus on the overall expected value.

Expected value

The word expected value also comes from gambling theory, which quantitatively answers the question: "If I keep doing this, what will happen?" A game with a positive expected value is a game that is likely to be won. The game of blackjack has a positive expected value after the players have the advantage.Games with negative expected value are games like roulette and craps, where the house has the edge, so gamblers always lose in the long run.Casino owners are well aware of expected value theory.They know that with so many gamblers playing the game, even a few percentage points of positive expected value for the casino can pay off in the long run.Casino owners don't care about their losses because such losses only further stimulate gamblers.For the bosses, losing is just the cost of doing business, and they know that they are the ultimate winners.

turtle thinking
Take a long-term view of transactions.

Avoid outcome bias.

Believe in the power of positive expectations.

That's how the Turtles looked at losses: they were just the cost of doing business, not a bad trade or a bad decision.To do this, we have to understand one thing: in the long run we always get back what we lose.The Turtles believed that a trade with a positive expected value would be successful in the long run.

If Rich and Bill say that a system has an expected value of 0.2, that means you're making 1 cents for every dollar you risk.They calculate the expected value of a system based on its historical transaction records.Expected value is equal to the average profit per transaction divided by the average risk per transaction.The risk involved is equal to the difference between the initial strike price and the stop loss price (that is, the price at which the stop loss is exited in the event of a loss), multiplied by the number of contracts bought and sold, multiplied by the size of the contract itself.

(End of this chapter)