The Trader’s Summer Reading Series: Episode 2— The Complete TurtleTrader
A story that shook & shaped Wall Street.
Option Screener and The Wheel Screener are trader-friendly option screeners that analyze, classify, and categorize all options available on the market on a given day. The team is always more than happy to share their technical insights, market opinions, and methodologies here on Medium. This article continues our summer reading series, where founder Chris will be reading trading and market books all throughout the summer. We hope you’ll join us, and we hope you enjoy the article!
This Week’s Book: The Complete Turtle Trader
The Complete Turtle Trader was published in 2007 by Michael W. Covel and tells the story of 23 traders who were trained by legendary traders Richard Dennis and William Eckhardt that flipped traditional trading strategies at the time (the 1980s) on their head- buying into new highs and selling into new lows. In other words, the fundamentals of any trend-following strategy. Despite the non-conventional aspects of the strategy, the turtles and their successes, failures, and controversies lead ultimately to a sort of legendary status of the turtles and their strategies.
Book Takeaways
This book is an excellent contrast to our first book in the series, Reminiscences of a Stock Operator by Edwin Lefèvre, as it provides a real story with real quotes from interviews and research by Covel. While Reminiscences of a Stock Operator focuses more on the psychology and anecdotes from trading and the markets, The Complete TurtleTrader tells a real story with hard facts of how the turtles were trained, ultimately disbanded, and finally ended up finding different paths of their own.
The Turtle System
One of the most valuable and interesting parts of the book is the details of the exact system used by the Turtles, which was kept quite secret and elusive for many years. Keep in mind this system is wholly for futures trading, and as such the system uses futures contracts, which are very different from the concept of shares. The system can be broken down into how the Turtles took trades, managed trades, and sized trades:
Taking Trades
- to take a trade there were two systems:
1. a shorter-term system: a 20-day price breakout (either a new high or new low) as entry and a 10-day price breakout in the opposite direction as exit
2. a longer-term system: a 55-day breakout (either a new high or new low) as entry and a 20-day price breakout in the opposite direction as exit
The shorter-term entry signal system had a filter requirement: it had to be ignored if the last trade that would have been generated by the short-term strategy would have been a winner.
Managing Trades
- for managing trades, the Turtles worked with “N” — the 20-day moving average of the average true range (ATR)
- the initial stop was set to 2 “N”, but could be moved to breakeven / up for each 1 “N” that the trade moved into profit
- the Turtles were allowed to pyramid up to 5 “units”, 1 unit per N that the trade went in their favor — pyramiding is a system of adding additional contracts as the trade continues in your favor
Sizing Trades
- the Turtles worked with “units”, where a unit is defined simply by 2% of their total capital on hand size. Note that in this case, a unit doesn’t necessarily always mean exactly 1 contract — to find the actual number of contracts, you must first know your contract risk — defined by the initial 2N stop loss and what leverage (depending on the contract) that 2N equates to in cash. Then, the number of contracts you can use is that 2% value divided by the contract risk value. You would then round down to the nearest whole number of contracts to keep a more conservative risk management system.
Risk Management
- initial max risk was a hard limit of 2% of the account size
- per 10% of drawdown, cut the max risk by 20%
- adjust stop to breakeven for every 1 “N” in the trade’s favor
Recap
Key values:
- “N’”— the 20-day moving average of the ATR
- “unit”-2% of total cash on hand
Risk management:
- initial stop loss of 2N
- always a max risk of 2% of the account
- pyramid up to 5 units
- decrease risk by 20% per 10% drawdown
So, in conclusion, the system is in no way technically complex or challenging to understand. Often mentioned in the book were rather the psychological challenges, as almost always is the case, that come along with trading. Specifically with this system where winning trades could take months to pan out, and where losing trades would hit that rather large and scary-looking 2N stop loss. It would be interesting for the team to begin paper trading this system and see how well it applies in our modern futures market… perhaps another time.
Our Rating
Now, the moment you’ve all been waiting for, our Official Wheel Screener Book Rating™! We’ve decided to rate The Complete TurtleTrader a 4/5 star rating:
⭐️️️️️️️️⭐️⭐️⭐️
This is a book that not only highlights and details the very nitty-gritty of the technical trading criteria and strategies used by the Turtles, but also the real-world pressures and politics between entities of the trading world — traders to traders, traders to clients, and much more. The only reason we took a star away is that the last quarter of the book is simply a broad overview of the Turtle's current whereabouts (or lack thereof!), and a bit of defense of legal litigation by the author — in our opinion, this whole section of the book doesn’t add much interesting content and certainly nothing about trading strategy or psychology. Otherwise, this is a classic if you want to learn the story and origins of modern-day trend following and those who created and used it.
Thanks & Stay Tuned!
Tune in to the next episode to find out what book we’ll review next!
Until next time,
-Chris & The Wheel Screener Team
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