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3 Ways to Trade like a Turtle

Despite the title of this post, this is not another analogy between long-term investing and the story of the tortoise and the hare. Instead, in the trading world a Turtle is known as a protégé of Richard Dennis and William Eckhardt, who ran a Commodity Trading Advisor (CTA) business in Chicago during the 1970’s and 1980’s. These two traders conducted a trader training experiment based on disparate opinions on whether or not trading was an innate skill or could be developed. After the first round of successful training, another round of testing was completed with similar results. That is, the Turtle trader trainees were able to trade profitably using the set of rules taught by Dennis and Eckhardt. One of the trainees was Jerry Parker who went on to found and run Chesapeake Capital Management for the last few decades. His firm specializes in medium to long-term Trend Following trading principles that he learned while in the Turtle program.

In a recent interview Parker highlighted three ways to survive in the trading game based on his experience. Under Trend Following each of these three concepts are employed naturally. Parker advises that traders diversify, trade with the trend, and cut losses quickly.

First, risk can be mitigated through diversification. This can be accomplished by trading multiple asset classes, using different time frames, or employing unique systems. For example, your system can have some exposure to interest rates, equities or stock indexes, currencies, and various commodity products. Doing so will minimize risk at different periods in the economic cycle. Additionally, you can design a trading strategy that uses a 200-Day Simple Moving Average (SMA) to identify a long-term trend or use a 10 and 20-day SMA crossover system to delineate short-term trend direction. As a result, you will diversify your trading time horizon. Also, you can complement various trend methods with mean-reversion strategies.

Parker’s second piece of advice, trading with the trend, is as old a strategy as you can find in the market. However, it still works. Whether you believe that macro-economic policy, fundamentals, or behavioral biases drive a market, trends will persist. In fact, Perry Kaufman conducted five Trend Following trading studies using a simple moving average, exponentially weighted moving average, linearly weighted moving average, linear regression slope, and breakout system across seventeen markets. He notes that “the first and most significant point is that results are all profitable. That means Trend Following works” (Trading Systems and Methods). As a trader, your job is to be on the right side of the trend and take as much of the profit from the move as possible. Of course, if a trend does not materialize after a false signal then risk management becomes paramount.

Finally, Parker advises traders to cut their losses quickly. Clearly, “quick” is subjective and will vary by a trader’s risk tolerance and specific system parameters needed to create positive expectancy. In other words, your gains must be larger than your losses to have any chance of surviving in the markets. The basic premise of Parker’s comment is that successful trading is based on risk management policies that cut losing positions before too much damage has been done to your account.

If you are not doing so already, take time to reflect on how you can better execute on these three core concepts in your trading.


As always, please feel free to contact me with any comments or questions. Thanks for reading.


JD
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