Turtle Trading Rules

Chapter 8 Turtle Training Course (2)
Give an example of how the Turtles weigh risk.Suppose there is a gold transaction, the buying price is $350, the stop loss price is $320, and a total of 10 contracts are bought, then the risk level of this transaction is equal to: the difference between the buying price and the stop loss price ($30) Multiply that by the number of contracts (10 contracts) by the size of the contracts themselves (100 ounces of gold per contract), and you get $30000.

Rich and Bill encouraged the Turtles to focus on the long-term effects of an approach and ignore the inevitable short-term losses.In fact, they argue that periods of loss are often precursors to periods of profit.This training is critical to the future success of the Turtles, as well as their ability to stick to the rules in the face of adversity.

Trend Following Strategies
A trend is a phenomenon in which prices maintain a changing posture over a period of several weeks or months.The basic strategy of trend following is to buy at the beginning of an upward trend and exit before the end of the trend.There are three easy-to-form trends in the market: uptrend, downtrend, and horizontal trend.Rich and Bill asked the Turtles to buy when the market has just turned from a horizontal trend to an upward trend, to sell short when the downward trend is about to begin, and to exit immediately after the end of the trend. Or a downward trend becomes a horizontal trend.

Interestingly, over the years several people have studied the secret laws of the Turtles, and others have made a fortune teaching them.In fact, the law we use is just an insignificant factor.There are many other well-known trend-following methods that are as successful, if not more successful, than ours.In fact, the methods we used were well known at the time the Turtle Project was underway.

You can succeed with well-known ideas and concepts, but only if you stick to those laws consistently.This is the secret of trading, and the secret of the Turtles' success.

The particular method we use is called the breakout method, sometimes called Donchian channels because it was Richard Donchian who popularized the channel breakout method.The basic idea of ​​this method is to buy when the market surpasses the highest point in the past for a certain period of time (that is, when it breaks through the previous price level).We have two systems: an intermediate-term system that Rich and Bill call System 1, which bases highs and lows on prices over the past 20 days (or four trading weeks); The long system, known as System 4, determines breakout points based on highs and lows over the past 2 days (60 trading weeks).At the end of each trading day, we recalculate the high and low breakout points for both systems.Generally speaking, what we have to do is to look back at the past period of time and find one or two high points based on the visual characteristics of price changes.Most of the time, the highs don't change, so we have nothing to do.Each system has two exit criteria.The first one is the stop loss exit point measured by N: the loss must not exceed 12N, which is the average of the two true fluctuation ranges.To put it another way, this drop is exactly 2% of our total account, because our method of determining the volume of transactions in each market is also based on N.

Everything about a turtle training class can be boiled down to these 4 main points:
1. Take Advantage: Find a trading strategy with a positive expected value because it will generate positive returns in the long run.

2. Manage risks: Control risks and hold your ground, otherwise even if you have a system with positive expectations, you will not be able to wait for the day when it produces results.

3. Unswerving: Only by unswervingly implementing your strategy can you truly obtain the positive expected value of the system.

4. Simple and clear: The essence of the Turtle method is actually very simple - catch every trend.Most of your profits may come from just two or three successful trades, so don't miss any trends, or your whole year's efforts may be for naught.It's simple and easy to understand, it's just not easy to do.

As you will see in the actual trading examples in the next section, this last point is very important.In my opinion, when we start to actually trade, the details of our particular approach are less important than being steadfast and not missing a single trend.It's easy to lose sight of these simple concepts when we're putting real money into the market.

First actual combat

The two-week training class is finally over, and the whole class is eager to try, eager for the actual combat.We were back in Chicago after the New Year's Day break, and we came to the Insurance Building on Jackson Avenue, which stood shoulder to shoulder with the Futures Exchange building.A huge office on the 8th floor of the building is our workshop, and we are each assigned a desk.

The tables are arranged in pairs, a total of 6 pairs, with 6 feet between each pair.We all have the chance to pick a table, which means we get to choose who will play alongside us in the coming days.There is a direct-dial telephone with a separate line at each desk.

Each week the Turtles were given a table showing contract volume per $100 million of trading accounts in each of the markets we participated in.However, to simplify the trading process, Rich and Bill asked us to use the same size of position in each market: 3 contracts.Our maximum position size is 4 units, or 12 contracts, for each type of contract we trade.This roughly corresponds to a $5-$10 account.

We have complete control over our own accounts and can make any trades we want as long as we can account for each trade and generally follow our system.For the first month we all kept our journals, where we noted the reasons for each trade.Most of my notes are of this style: "Buy at $400 because it's a 2-day breakout according to System 60."

At the beginning of the new year, the price of heating oil in February 1984 rose from $2 to $0.80, so I bought 0.84 contracts in accordance with the system requirements.The trade was an instant profit, and I bought my limit of 3 contracts in just a few days.Over the next few days, our "trading room" was filled with buy orders and laughter: the price of heating oil shot up to $12 in less than a week.

At that time, there was no such thing as a price chart automatically printed by a computer.We can only look at the charts in the Commodities Perspective, a tabloid with charts for most of the actively traded futures contracts that month.Since these charts are only updated weekly, we have to pencil in new trends after each trading day.

But that doesn't work as well when it comes to the February heating oil contracts, which are two weeks away from expiry and Futures Watch no longer covers them.The problem is that we can only use the old chart, and the high on the old chart is only around $2, because the previous year's high was only $0.90.This means that the latest prices have become veritable "off-the-sheet" information.In desperation, I cut out a piece of blank space without price information on the old chart from last week, and received it at the top of this chart, which can be regarded as a continuation.In the end, the price movement I recorded was 0.89 inches higher than the original chart (12 inch is about 1 cm).

It was during this process that I noticed something that surprised me.In fact, it still baffles me to this day—I'm the only Turtle who bought all 12 contracts.The other turtles, for some unexplained reason, did not follow the system taught by Rich and Bill.

Why?Because they are afraid of getting a bad start?Because the February heating oil contract expires in a few weeks?Or is it simply because they prefer a more conservative trading style?I have no idea.But I can't figure it out, why they all took the same training course as me, but none of them filled their tanks of heating oil in February? (We all use the term "full position" to describe buying four full positions.) Rich and Bill reminded us over and over not to miss the trend, but after only a few weeks, many Turtles were on a big trend Missed opportunity in front of him.If we were using a normal $2 million account to trade, our one position unit should be 2 contracts instead of 4 contracts, which means I can make $100 on this trade, which is 18% of the profit.

Just after I found out that I was the only Turtle with a full position, the market was volatile for a few days.Heating oil fell from a high of around $0.98 a share to $0.94 a share, down about $1200 per contract.After two days of market corrections in a row, I noticed another interesting thing.

According to Rich and Bill's training, when the market has a short-term downward adjustment, the correct approach is obviously to hold positions and wait for profits to decline.Here's what I did: I held all 12 contracts throughout the price decline.In a matter of days, my profit dropped from $5 to $3.5.But the other Turtles, who also held large positions, did not do so, and when they saw their profits quickly evaporate, they hurriedly liquidated their positions and exited.

Next, the market recovered.The next day, prices continued to rise.Soon, the market broke through the previous high of $0.98 per share and climbed all the way to $1.05 per share.The market peaked just a day or two before the contract expired.

At this time, Dale called me from Rich's office and told me that Rich didn't want to actually pick up the goods, so I sold all 1.03 contracts at $12 per share, which is a short distance from the February contract at $2 The highest price is only a stone's throw away.In the vast majority of cases, we will not exit just because the first contract is about to expire.We just roll over the position to the next contract, that is, exit the position that is about to expire in the current month, and switch to the position in the next month.But this time things are different because this time the trend is limited to the February 1.053 contract and there is no reason to roll trades.This also means that I can only catch this trend by pegging the February contract.

The price action of the February 1984 Heating Oil contract and the entry and exit points in this first major trend I encountered in the Turtles.

After this trade, my account made a profit of $78000.Just because I stuck with what we had learned, I was rewarded almost three times as much as any other Turtle.Several Turtles with large positions like mine all exited at the bottom of the previous pullback and ended up missing a full half of the trend.As for the sea turtles who didn't participate in this transaction at all, they naturally got nothing.

Whether to make a profit and how much to make has nothing to do with the knowledge you have mastered. It is entirely caused by emotional and psychological factors.For me, this is an incredible thing.We learn the exact same stuff, but I get more than 3x the return in January than the other turtles.They were all very smart people who studied under the most famous traders of their time.Several of them would step into the ranks of the world's top traders in a few years, but during the initial internship period, they did not execute our strategy.

Over the years since, I have learned countless times that emotional and psychological strength is the number one factor in successful trading.This time was the first time I experienced this concept and the first time I witnessed it in practice.

first report card
During the first month of actual combat, Rich and Bill visited the site every two weeks.After the first month was over, they came back and gave the class a question-and-answer session.During class, Rich asked the other Turtles why they weren't buying more heating oil.Some responded that they thought it was too risky because the price was rising so fast; others said they didn't think the trend would last long because there were only a few trading days left in that contract.

My take is different.The reason I'm sticking with our system is because I believe Rich will judge us on our ability to execute it.I also believe that it doesn't matter if we lose money as long as we follow the system faithfully.Conversely, if we didn't follow the system, even if we avoided the loss, we wouldn't get Ritchie's approval.

I think the riskiest thing is doing nothing, no action at all.Rich made it clear during the quiz that the heating oil deal was the right one.There is no better case to teach the class a valuable lesson.Just over a month after the training, we realized the importance of not missing the trend in practice.Moreover, the lesson came too deep, and all of us will never forget it.

Rich has said he's going to give the Turtles a $100 million trading account each after the first month is over.He also reminded us that many people in the class may not get this number, but if they can prove their ability, they may get a bigger number.As a result, only a few people in the class got the full $100 million promised by Rich because Rich had confidence in their ability to implement the system.Many others had to continue trading for the next few months with the same small account we had in January.

To my surprise, Rich gave me a $200 million trading account.Apparently he liked the way I handled the heating oil business.

(End of this chapter)