Turtle Trading Rules

Chapter 9 Thinking Like a Turtle (1)
A good transaction has nothing to do with right or wrong, it only represents the correct transaction.If you want to be successful, you must take the long view and ignore the individual outcomes of individual transactions.

After witnessing the success of the Turtles, many traders and investors have come to the conclusion that Richard Dennis won the bet with Bill Eckhart, proving that trading talent can be taught.To this, I beg to differ.I think the bet ended in a draw.

People don't know that many turtles (perhaps 1/3 to 1/2 as many) are less successful than the top performers, or even not successful at all.Therefore, although most of the Turtles who have accumulated experience in the first month and subsequent practice have grown into excellent traders, there are also some who have left the Turtle Project with a record of failure.The difference between the strongest and the weakest stems from their individual psychological characteristics.Some people are more receptive to the Turtle Way than others, which shows that while trading methods can be taught to most people, there are some people who are better suited to be a trader than others.

To understand a good trader, you must understand how his or her emotional characteristics influence trading behavior.If you are born with those qualities, it will be easier to learn the correct way to trade.If you're not that gifted, you have to develop those qualities.This is your first priority.So, what are the qualities that should be possessed?
avoid outcome bias
Good traders think about the present and avoid thinking too much about the future.Novices want to see the future: if they win, they think they were right and feel like a hero; if they lose, they think they're a fool.This is wrong.

The Turtles don't care about being right or wrong, they only care about making money or not.The Turtles don't act like prophets who can see the future. They never take one look at the market and say, "Gold is going to go up."For the future, they believe that the details are agnostic, but the characteristics are predictable.In other words, you can't tell if a market is going to go up or down, or if a trend is going to end right away or in two months, but you do know that a trend is coming and that the pattern of price movement won't Change, because the emotional and cognitive characteristics of human beings do not change.

In fact, it's much easier to make money if you're wrong most of the time.If most of your trades are losing money, you are not trying to predict the future.Because of this, you don't care about the individual results of individual trades, because you already know that any one trade has the potential to lose money.If you have this kind of mental preparation, you should also understand that the results of individual transactions do not represent your intelligence level in the slightest.Simply put, to win, you must free your mind from outcome bias.How individual transactions turn out is irrelevant.If you lose 10 times in a row and still stick to your strategy, you're doing pretty well, just a little bit unlucky.

avoid recent preference
Ironically, not only do most traders think too much about the future, they also think too much about the past.They will dwell on what they have done in the past, the mistakes they have made in the past, and the deals that have failed in the past.

Turtles learn from past experiences, but don't dwell on the past.They don't blame themselves for past mistakes or dwell on past failures.They know it's just part of the game.

Turtles look at the past holistically and don't pay particular attention to recent events.This recent period is no more important than any other period in history, it just feels that way.The Turtles avoid near-term preferences.They know that most traders in the market have a near-term bias, and because of this, the market tends to reflect that bias.The ability to avoid near-term bias is an important ingredient in successful trading.

Years after the end of Project Turtle, I have seen first-hand the hazards of the recent preference.After the Turtle Project ended, every Turtle had to wait 6 years before telling others about our method, because our non-disclosure agreement expired in 6 years.I have several good friends who are very interested in our approach because they know how well the system works for me.

In 1998, I taught my method to a friend, reminding him that steadfast execution of the system is the key to success.I told him that he had to strictly follow our strategy in all his trades or he would not succeed.The results of it?He ended up falling prey to recent preferences.

Around February 1999, I asked him how the cocoa trade was doing because I had noticed a big downtrend in the cocoa market.He told me he didn't trade cocoa because he had lost too much money on cocoa and thought it was too risky a trade.So, if you use the breakout method to trade cocoa, then from April 2 until the big trend appears, your trading records will be as shown in the table.Note that before the big winning trade in November 1998, there were 4 losing trades in a row.

This is a typical situation in trading markets.If you only considered one market at one particular point in time, the situation might look bleak.In some markets, you may have to wait a few years for such a good trend.If you put too much weight on the near-term, you might mistakenly think that these markets are untouchable.

Most traders are tormented by near-term bias.During the time of the Turtle Program, some Turtles were so swayed by this preference that they never tasted victory and were eventually eliminated.Ironically, trends seem to emerge just after everyone else has given up, and they can often be easily caught and paid off.We talk about this phenomenon in more detail in the Portfolio and Market Analysis section of Chapter 13.

avoid predicting the future
We have already talked about the impact of human cognitive biases on traders.There are three biases that you must overcome at all costs: near-term bias, outcome bias, and the urge to predict the future.

To overcome the third bias, you have to think about the future in terms of probabilities, not predictions.When my friends heard about my achievements in the Turtle Project, they couldn't stop asking me which direction a certain market was going to move next.Everyone took it for granted that since I was part of a famous training group and had made millions trading futures, I must have some sort of certainty about the future.My standard answer, of course, surprised them: "I don't know." In fact, I really don't know.Of course, I can take wild guesses, but I have no confidence in my ability to predict the market.In fact, I have been consciously refraining from trying to predict the future movement of the market.

Unfortunately, unless you happen to be an actuary for an insurance company, you don't generally think in terms of probabilities.People think about whether something is possible or impossible, but never about probability, which is why insurance companies insure against the risk of uncertainty.A hurricane leveling your house is one such risk.If you live near a tropical ocean, there is some chance that your home will be damaged by a hurricane, and slightly less likely by a powerful hurricane.Even less so if the hurricane is strong enough to completely destroy your house.

If you knew 100% that your house would be destroyed by a hurricane, of course you wouldn't buy insurance and you would definitely move.Fortunately, the probability is less than [-]%, far from it, so you will decide to stay and buy another home insurance.

An insurer that offers hurricane disaster coverage is well versed in probability and prices such plans with an eye toward how much damage a hurricane might do to a home in your location.This is the secret of making money for insurance companies: the income of insurance companies selling insurance is greater than the potential cost of claims.

In this respect, trading is very similar to insurance.Transactions are fraught with uncertainty.You don't know if a trade will make money or not.The best you can do is trust that, over the long run, your rewards will be greater than your level of risk.

(End of this chapter)